China 101: Market Entry Strategy. 6 Points to Consider

By Andrea Cristancho, Senior Business Development Manager at JLJ Group

China’s business environment is dynamic and particular in its essence. It welcomes business from different nations and demands skills, commitment and long term planning to stay afloat. It can be rewarding for many foreign companies, especially those who conduct the proper research and carefully craft a strategy to execute.

Here are some main points to consider:

1.Regulatory environment.
In China, the Foreign Investment Industry Guidance Catalogue last revised in August 2011 regulates foreign investment. It’s a document issued by China’s National Development and reform Commission (NDRC) and the Ministry of Commerce (MOFCOM), which oversees foreign investment in Chinese companies. Depending on the business activity, the catalogue classifies direct investment as encouraged, restricted, prohibited or permitted. Therefore, one should look into China’s regulatory environment and find out the regulations on their particular business type, licenses required to operate in compliance with the local authorities, costs and duration of the set up process, among others.

2.Market Assessment.
China is a diverse country with unique regional market segments, which should never be looked at as just a single China. In addition cities are divided into tiers cities including tier 1 such and Shanghai and Beijing, and tier 2 cities as Chengdu, Dalian, and Hangzhou, as well as numerous smaller tier 3 cities. When looking at the market, companies should consider target customer and size, generation groups, consumer demands and purchasing behavior, as well as market trends, barriers and key competitors.

3. Location and Distribution Channels.
Whether you decide to go solo, represent your firm, or partner up with a local investor, you would need to spend some time and resources researching your ideal location within China; particularly at the district level and perform some due diligence before choosing your office location. Companies should also be communicating and negotiating with a short list of potential partners, or dealing with a third party provider; while trying to understand cultural differences and working within the demands of the Chinese style. There isn’t only one ideal way, it requires you to find which best fits your business model and is in line with your long term business model and head quarters vision.

4.Internal Assessment.
At the initial pre-entry level, a lot of time and resources are invested on evaluation phase. Most of the time, reports are presented at head quarters or to a board of investors for final approval. At this stage, it is advisable to evaluate how ready is the management and main decision makers of your corporation to invest in China, including financial consideration, IPR, relocation, staffing and management soft issues, and execution planning. In addition, assigning key points of contact is a priority as the approach to china market entry is being developed and communicated across the organization.

5.Entry Modes
Having your business plan and China Market Entry strategy at hand, consider your market approach evaluating the strategic importance for your head quarters and your ability to exploit the market once invested. There are four primary entry modes:

Export Entry.
Using an intermediary agent for the entire process or handling export –in house and a local Chinese distribution partner for import and sales in China. It doesn’t require a large capital expenditure but provides limited control.

Contractual Entry.
Licensing your brand to individuals and companies in China or sub-contracting with local manufacturers. Requires less capital expenditure but again provides limited control.

Equity Entry.
Entering the market by equity includes Wholly Foreign Owned Enterprises (WFOE) such as Manufacturing, Trading, or Service WFOE (examples are consulting, training, restaurants and management service companies), a Foreign Invested Commercial Enterprise (FICE allows greater flexibility in terms of business activities that include retail, wholesale and franchise), or through a Joint Venture or M&As.

Representative Offices.
A Rep Office represents the interests of the foreign investors acting as a liaison office legally established for the parents company. It may conduct market research, develop partnerships and business channels; however, all business transactions are handled by parent company, mainly the issuance of commercial invoices. Rep Offices do not have a minimum investment requirement since they are not considered a Foreign Investment Enterprise.

6.Registration Steps.
Below is the typical process for setting up both Foreign Invested Companies and Rep Offices. The government offices involved in this process includes the Ministry of Commerce, Administrative Bureau for Industry and Commerce, State Administration for Foreign Currency, Taxation Bureau, The Customs Office, and the Statistics Bureau.

In brief, entering the China Market requires experience and long term planning, as any other market, but developing the aforementioned points and assessing your company entry mode should take you closer to success. Therefore, having a solid team on the ground, including your team and your advisors, a solid network of contacts Guanxi will also help you navigate China’s business environment during pre-entry, execution and growth of your business in China.

By: Andrea Cristancho
Senior Business Development Manager
The JLJ Group – solutions for China Market Entry
Andrea.cristancho@jljgroup.com

What do you think?

You may also be interested in this articles:
7 Top Tips for Entrepreneurs Starting Business in China
The Entrepreneurs Dilemma: How Much Money do I Invest…? 
The Entrepreneurs Dilemma (II): How do I navigate through a founding shortfall in China?
Researching the Market before you Start your China Business: A Photography Gallery Story
Getting Hold of the Consumers in China: Education and Networking
China Stories: Choosing the Wrong Company Formation Agent could Kill your Business!
Seeing is Believing… and I mean it!
Doing Business in China: 14 Insights Gained on the Ground
The Power of Networking in China
What Do I Need to Know About Guanxi
Is it All About Who you Know?
Foreign Women in Business
Ten Tips for Doing Business in China

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A Joint Venture Survival Guide. 22 Facts and 22 Practical Tips- (3 posts compiled)

The following post compiles the complete “A Joint Venture Survival Guide” series. I´ve compiled it to help sharebility & bookmarking. If you had not read them before, I recommend it as it has got really good reviews. I hope you find it  useful.

Joint Ventures (J-V) in China can go well, and can also go very wrong. When the latter is the case, problems come up from where you less expect them. “Mike Smith” (not his real name) spent two years in rural China supervising his employer’s interest in a Chinese joint venture where they were the majority partner (deal signed before he landed there). His case falls within the second category I’ve mentioned (I would in fact say that all that could go wrong went wrong) but that has given him invaluable lessons on how to ensure things are done right. He has also met on the way a number of joint-ventures facing quite similar challenges to the ones he experienced.

We met to talk about his time representing the foreign partner and I’ve drafted “A Joint-Venture Survival Guide” based on his experiences, opinions, tips and comments (which means some of these tips will only apply only to manufacturing joint-ventures). 

Some introductory thoughts

1. China is a noble and good society… but when it comes to doing business, the value system changes. Ripping off a foreigner may be seen as a clever thing rather than a bad one.

2. Beijing, Shanghai and Guangzhou are in a universe of their own. Drive just 100 km away into central China and reality changes. It is a hardship environment and corruption is readily encountered.

3. You may have successfully set up joint-ventures and businesses in other countries. Do not assume China is going to be the same. You are lost without an expert if you are going to deal with a local partner.
“My company had successfully set up J-Vs across the world, and nowhere did they face the situations they faced here. They assumed they knew it all, and that was a big mistake”.

The Essentials”
4. The foundations for your success will be laid before you sign the deal.
Preliminary work is essential, and I cannot stress this enough. Once you have signed you are helpless. And later on, once your million dollars are in China, you will not be able to get them out unless you exit the J-V. There is plenty of room for disaster so make sure you dig into every single hole to figure out where the problems may be.
! Tip: This is the time to get as much information as you need. You need to be able to access all books, information about operational manual, … You may hear the somewhat overused sentence “What is the problem? Don´t you trust me?”. Well it is not about trust, it is about business, and companies that have nothing to hide will share the information with you. 

5.Confidentiality and know-how protection will be difficult in a small cities. All the legal issues about this will be judged in the city in which it happens, which means that if you have a company in Shanghai and someone “copies” your product in Ningxia, the legal procedure will be carried out in Ningxia so you will be dealing with all the difficulties of operating in a place that is not a j-v business hub.
! Tip: We are a European SME. If that is also your case you canhave free brief advice from the European Chambers of Commerce. Also a free advice for intellectual property, copy right, etc in China IPR SME Helpdesk

6. A GOOD consultant/advisor: Priceless.
You need real in-depth expertise to pull this one off successfully:
! Tip: “J-V conflict resolution and dissolution in China is really complicated compared to other countries. Consultant/Advisor companies have an instinct for knowing the real situation” 

7.[On consultants] … But find the one suited to your size
“The reality on the ground for SMEs is quite different to that of MNCs. We don’t have their leverage and muscle power and we deal with different issues/situations. It is essential to get on board a very good consultant but I wouldn’t recommend one of the big ones. I think they are better suited for big companies.”
! Tip: MNCs are often interested in high tech, setting up R + D centres, the pharmaceutical industry, medical issues and they will find some decent protection from the Local Government. In the case of SMEs that do business outside big business hubs, protection will be very difficult to guarantee and there will be unimaginable issues unless they hire the right consultant/advisor. And believe me, consultant/advisor big names will not help you to find the back door of your J-V.

8. Sign the right “pre-nup”
You obviously don’t want your relationship to go wrong, but if things happen you need to have put in place the right “break-up” conditions.
! Tip: Always use the Chinese or Hong Kong Arbitration Court. Most companies feel more comfortable with international arbitration, but what do you do when your Chinese partner doesn’t show up or doesn’t comply with the resolution? It needs to be done in China or Hong Kong where the resolution will be mandatory and enforceable.

9. Your Potential Partner is Well Connected … Maybe Good, Maybe Bad
Experience: It is quite common to be taken on the “big tour”, introduced to the city mayor, the bank’s president, and all sorts of top-end contacts. Your partner will put especial effort into making a great impression and showing you how easy doing business in China is going to be if you deal with him.
! Tip: Do not be dazzled by your partner’s connections …They will not necessarily be used for your benefit.
The fact that your partner is well connected is good (you obviously don’t want to end up with a nobody), but it is also a fact that at times those connections are only used for their own benefit.

10. Financial Reports: “I can’t live with or without you”
Financial reports: you need them, if only because when things go wrong you will be the first one fired if you did not order a financial report. But just be aware that reports can easily be falsified, and a lot of relevant information may be missing.
Experience: I will not get into too much detail but let’s say that I have even seen the falsifying process in action. Do not believe everything you read, and be aware that there will be facts/realities that are not reflected in those reports.
! Tip: There are things you will only get the feel for if you base yourself at your potential clients´ workplace. My recommendation would be to place your trusted person (who by the way should be China-knowledgeable and understand what he/she is looking for) at the company´s site . You need to see how the factory works, how many workers there are, their accounting, their stock control ….

11. Tax Planning: “Tax Breaks. Do not believe all you hear”.
While you are negotiating the joint venture you will be promised a lot of benefits. Tax breaks are a common tool to lure you into a location that needs to be developed. A lot of companies start operations in a location partly because they have been offered corporate income tax exemptions or reduced/zero import/export duties. It is also common to find that the day you to try to apply for them, you are told that the central government has changed the regulation and they can no longer grant you the benefits they promised.
Experience: We were promised tax exemptions on all those tools and parts required for our product manufacturing. It did not happen. Not even once.
! Tip: As mentioned in tip number 5 , it is essential to get the support of a good consultancy firm. Your investment should also make sense regardless of the tax exemptions or other promised benefits.

12. Let me guess: your Chinese partner wants to contribute the land to the joint venture.
Experience: The Chinese partner always wants to contribute his own properties to the J-V. But, can he give you actual proof of the real land value? These are common situations to encounter:
– The real value of the land, does not correspond to what your partner is claiming.
– The audited value presented and paid by your Chinese partner has been (easily) falsified.
– All sorts of excuses to justify the absence of a purchase document stating the real value they paid: “Government does not give invoices. We got a good deal …” . Do not fall for them.
In our case, we got an independent valuation of the land. It was worth 30% less than what our partner claimed.
! Tip: Do not fall for excuses. A land purchase should be properly documented. Beware if is not.

Experience: We wanted to buy land for the JVC. Our Chinese partner finally presented what he deemed was the best possible location and the required size(we felt it was too big). The land value would be considered capital contribution by the partner. He presented an alleged Government document stating the land value. The document had no seal so we suspected something was wrong and requested an independent valuation. The land value estimation was 200,000 € cheaper than the value presented by our partner. Our company´s President trusted the partner so they decided to take his word on this (by that time MD was already suspicious about the partner). The land was purchased, the invoice was never seen. He showed us an ownership title and the land became his capital contribution. Later on I managed to located the real purchase documents and the deal had been sealed at a 400,000€ cheaper prize.

13. Does your land have a license to have a factory built on it?
You need to watch out for this one. Chinese companies often ignore this step. You may find sizeable companies operating (100 employees, tax bureau number, social security …) without the license to legally operate a factory/company on their land
. That may not be a problem while you stay together (they will surely have their ways to ensure there are no problems). But in the event of a split you may face one of these two situations:
– You want to sell it but you can’t because there is no licence
for the construction done.
– You want to operate it alone, but being a foreign company you will find the government inspection at your doorstep day one. And they will close it due to lack of permits.
! Tip: Make sure you know all the licenses the business needs to operate legally. If your partner claims to have the license for that land already, you need to see it. If licenses are pending have your expert/consultant involved in that matter.

14. Building the Factory- Oh Nightmare
This is another potential source of conflict. You will probably trust your partner to lead the factory construction works.
Experience: “…a workshop building would not progress and when I inquired I would get “We have run out of money”. Digging into the contracts details I would find a lot of irregularities like missing contracts, unsigned contracts …”
! Tip: “If your project involves building a factory, I would recommend to budget for 15% to 20% extra cost vs. agreed amounts. Timewise, I would build in an extra 40% as a buffer. Penalties should be included and quantified in your contract. And as mentioned before, always use the China or Hong Kong Arbitration Court”.

15. Check Company Operational Manuals.
Very often there is nothing written on how operations should function. When you land there and try to organise things you do not even know where to start. And what is worse, your Chinese partner is not interested in changing anything as he feels it has been working for him for years before you arrived.
! Tip: The trusted person I advise before to place in your prospective partner´s operation should check out the operational manuals and whether the company works in compliance with them. If there are no manuals in place, you should request them to record their existing processes so that you can discuss them and negotiate before the deal signature. 

16. Money Hole #1: Company employees & Social Security.
There are a couple of “black holes” that are often used to suck your money away: the stated number of employees in the company and the payments to social security. You need to get two proofs here:
– Proof of the total number of employees in the company
– Proof that they are paying Social Security for
those employees.
Do not accept their word for this.
E
xperience: Our partner kept swearing that the company had 74 employees. My calculation was that there were no more than 50 employees in the company. I asked them to prove their claim but there were no contracts to be seen. When I asked for the bank transactions to assess the amount of money we were investing in overheads I was told it was paid in cash. When I asked for the receipts signed by the employees they said there were none.
I was not alone in this situation. I encountered other companies facing exactly the same challenge.
! Tip: You need to check this when you are negotiating and you still have bargaining power. If you discover this when you have already invested several million dollars you will be helpless. Do not accept their word on this. In China they file Social Security online. They have a website where they can access, through their company name and password, all their social security, accounting and fiscal (tax) data. Request to have access to this while still negotiating.

17. Money Holes #2: Stock Control
Companies often do not have good stock control in place and this is another big “black hole” your money will slip through.
Experience: You are told they bought 10 units of a product and they just purchased 5. When you try to investigate in detail they tell you there are not stock control systems in place, or the switch off the computer, or they tell you it does not work …
! Tip: Make sure you have access to all the policies and procedures manuals before you sign a deal. And once you have access, make sure you assess whether the policies and procedures are really happening or not. It is also quite possible that they do not even exist
The people from the purchase department should be “your people”. If that does not sound possible it is better to create the department from scratch and hire a local purchase manager of your choice, that you can trust, to ensure proper control.

18. Money Hole #3: Accounting
How many accounting books is your partner keeping? Make sure you keep a tight accounting process.

Experience: I always used to work late. One evening I happened to walk through the accounting department and somebody had forgotten to lock away the accounting books. To my surprise, the number of accounting books was higher than what I thought our company was keeping. I did not need to be too smart to figure out what was happening. Our partner was using fake purchase orders to divert money into his own personal accounts. Our accounting team was also keeping the books for his own company, which by the way was not supposed to exist any longer but should have merged into the J-V.
! Tip: Make sure you have unrestricted access to all cabinets and locations where information is stored.
!
!Tip: Keep a very strict monitoring of the accounting. All expenses must come with proof of purchase,authorised and signed by you or your team.Fa piao (we could translatefa piao as “super-receipts – receipts that are hand-stamped and recognised for tax and other purposes)”
are difficult to audit as they usually come without a description of the expense.
!!!Tip: Develop a good relationship with the CFO
!!!!Tip: Purchases should come with double signature (CFO and your representative) on set days (probably not necessary more than three times a week as purchases are planned in advance)

Other things that could go wrong
19. Technology Transfer – IP Risks
A fact you should be clear about is that your partner is likely to end up copying your technology.
Experience: Our target market was China, so our J-V was supposed to manufacture a product more sophisticated than the existing competition in China but not as technologically advanced as our products in Europe. In order to do that, we needed to transfer some know-how to our Chinese partner. I strongly suggested against it but at that time, it would have been equivalent to giving up the project and I still did not have physical evidence of what was going on.
My fears were soon proved right and I caught them copying our electronic cards … And later on I found out about them copying machinery and tooling.
!Tip: Well, you have no way to control it. Fingers crossed and good luck (do not forget we are talking “deep China” and not main business hubs). If all steps have been taken correctly things are more likely to go better.

Most business people I´ve met in China share a view that the new generation of Chinese business people who have studied abroad understand how to do business for the long term rather than for immediate and dishonest gain.

20. Company Seal- Always with You.
In China documents can be signed and stamped with the company seal. Back home contracts would not be valid unless you have signed them. Here the company seal is enough to make a contract valid … so
!Tip: Never leave your Legal Representative seal with somebody else. If you absolutely need to, be sure you can trust that person 100% as that seal is equivalent to your own signature.

21. Be ready to test your endurance
Experience: My Chinese partner was responsible for my house utilities. Once I was left without power for several days, another time I had no running water for three days. I also got internet connection discontinued.
People around me also suffered. I went through three finance managers who left the company shortly after I hired them. I remember the case of one of them who would systematically arrive at the canteen to be told there was no food for him. These are highly paid professionals who have no interest in going through that hell when they can have a nice well paid job somewhere else.
!Tip: I think when you have reached this stage, things are going really bad. In this case, it could be safest to control your house contract and utilities directly (probably through somebody you trust).

22. Beware of direct communication between your partner and your headquarters.
When you start proving to be a “damned nuisance” in your partner’s life he may try to get rid of you in different ways. He may contact your headquarters and try to make you look like inept or make them believe you complicate your life (and everybody else´s) with non-existent problems and issues.
Experience: In my case the Chinese partner kept calling my company’s president and emailing the board of directors in order to undermine their trust in me. I was very lucky because in the end I managed to get access to all sort of documents that proved we were being ripped off. But I’ve later on met other people who lost their positions due to pressure from the Chinese partner.
!Tip: Invest in “Educating your Headquarters” before you start operating in China. Headquarters don’t like to hear bad news. And some of the stories you will tell them are so unbelievable that they may end up thinking you have gone China-mad.

So what are your tips and experiences in Chinese joint ventures? You can leave a comment or contact me to share it in a longer form!

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Chinese Negotiation: 4 Tips to Succeed in “Times of Silence”

By Matthias M. via Wikimedia Commons

Have you ever been in a Chinese negotiation where suddenly everybody goes silent? It is not uncommon and it does not happen by chance.

One of my interviewees, an expat who had gone through a substantial amount of negotiation while setting up a manufacturing plant, observed on the topic of Chinese negotiations:

“Silence plays a very important role in negotiation. Our Chinese business contacts know we tend to feel very uncomfortable with silence. We become uneasy. Hence they use silence during negotiations to strengthen their position”

This conversation came back to my mind recently while I was reading a newspaper article about recruitment tips “Listening skills a winner for job hunters” (Waikato Times, Saturday January 14, 2012) based on insights by Jeffrey Kurdisch in the Washington Post.

One of the tips in the article reflects that very same comment. I reproduce it here because it is as valid for job hunting as it is for negotiation and life in general:

“Be comfortable with silence
Several recruiters have told me they use silence as a tactic to see how job-seekers respond. Negotiations research suggests that people who are uncomfortable with silence tend to share information that may put them at a competitive disadvantage. Savvy job seekers accept silence during a conversation and are careful not to talk about things that will reduce their employability. They also use silence moments as an opportunity to check on their own non-verbal communication (sit up straight, project self-confidence, no distracting mannerisms). If you feel the need to break the silence, try asking questions.”

Silence is also used in a range of situations in which you need the other part to open up and share information. One of my relatives, who was a marriage counsellor till retirement, says “we often used silence during a counselling session to allow people the time and the opportunity to share things that they needed to bring out”.

So, silence is widely used to bring information out. And, in a business negotiation, information is power. So be aware of your reactions to silence and follow in your own negotiations the advice Mr Kurdisch was giving to job hunters- that we could translate here into negotiation tips:

Tip#1. Be comfortable with silence

Tip#2. Do not feel pressured by silence into talking about things that will put you at a competitive disadvantage

Tip#3. Use silent time to review your negotiation strategy/tactics

-Tip#4. Break the silence with questions, if you feel the need to talk (this way you will not give away information)

By the way, my interviewee was very relaxed about silence. His tip was aligned with the ones specialists suggest: “Just take silence as a brief break in your negotiation. Take that time for reflection and thinking about how the negotiation is going and how to take it forward”

What do you think? Have you ever faced a silent room in your Chinese negotiations?

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Related Posts:
36 Tips on How to Deal or Negotiate with your Chinese Suppliers
Sourcing from China: Who are the Happy Buyers?

A China Joint Venture Survival Guide. 22 Facts and 22 Practical Tips (III)

This is the third post of the series entitled “A China Joint Venture Survival Guide” based on Mike Smith’s experiences as his company’s representative in a Chinese joint venture. If you have not read our previous posts you can read them here:
A China Joint-Venture Survival Guide (I)
A China Joint-Venture Survival Guide (II)

A Joint-Venture Survival Guide (III).(Tips 16-22)

“Watch Out for the Money Holes”
16. Money Hole #1: Company employees & Social Security.
There are a couple of “black holes” that are often used to suck your money away: the stated number of employees in the company and the payments to social security. You need to get two proofs here:
– Proof of the total number of employees in the company
– Proof that they are paying Social Security forthose employees.
Do not accept their word for this.
Experience: Our partner kept swearing that the company had 74 employees. My calculation was that there were no more than 50 employees in the company. I asked them to prove their claim but there were no contracts to be seen. When I asked for the bank transactions to assess the amount of money we were investing in overheads I was told it was paid in cash. When I asked for the receipts signed by the employees they said there were none.
I was not alone in this situation. I encountered other companies facing exactly the same challenge.
! Tip: You need to check this when you are negotiating and you still have bargaining power. If you discover this when you have already invested several million dollars you will be helpless. Do not accept their word on this. In China they file Social Security online. They have a website where they can access, through their company name and password, all their social security, accounting and fiscal (tax) data. Request to have access to this while still negotiating.

17. Money Holes #2: Stock Control
Companies often do not have good stock control in place and this is another big “black hole” your money will slip through.
Experience: You are told they bought 10 units of a product and they just purchased 5. When you try to investigate in detail they tell you there are not stock control systems in place, or the switch off the computer, or they tell you it does not work …
! Tip: Make sure you have access to all the policies and procedures manuals before you sign a deal. And once you have access, make sure you assess whether the policies and procedures are really happening or not. It is also quite possible that they do not even exist
The people from the purchase department should be “your people”. If that does not sound possible it is better to create the department from scratch and hire a local purchase manager of your choice, that you can trust, to ensure proper control.

18. Money Hole #3: Accounting
How many accounting books is your partner keeping? Make sure you keep a tight accounting process.
Experience: I always used to work late. One evening I happened to walk through the accounting department and somebody had forgotten to lock away the accounting books. To my surprise, the number of accounting books was higher than what I thought our company was keeping. I did not need to be too smart to figure out what was happening. Our partner was using fake purchase orders to divert money into his own personal accounts. Our accounting team was also keeping the books for his own company, which by the way was not supposed to exist any longer but should have merged into the J-V.
! Tip: Make sure you have unrestricted access to all cabinets and locations where information is stored.
!!Tip: Keep a very strict monitoring of the accounting. All expenses must come with proof of purchase,authorised and signed by you or your team.Fa piao (we could translatefa piao as “super-receipts – receipts that are hand-stamped and recognised for tax and other purposes) are difficult to audit as they usually come without a description of the expense.
!!!Tip: Develop a good relationship with the CFO
!!!!Tip: Purchases should come with double signature (CFO and your representative) on set days (probably not necessary more than three times a week as purchases are planned in advance)

Other things that could go wrong
19. Technology Transfer – IP Risks
A fact you should be clear about is that your partner is likely to end up copying your technology.
Experience: Our target market was China, so our J-V was supposed to manufacture a product more sophisticated than the existing competition in China but not as technologically advanced as our products in Europe. In order to do that, we needed to transfer some know-how to our Chinese partner. I strongly suggested against it but at that time, it would have been equivalent to giving up the project and I still did not have physical evidence of what was going on.
My fears were soon proved right and I caught them copying our electronic cards … And later on I found out about them copying machinery and tooling.
!Tip: Well, you have no way to control it. Fingers crossed and good luck (do not forget we are talking “deep China” and not main business hubs). If all steps have been taken correctly things are more likely to go better.
Most business people I´ve met in China share a view that the new generation of Chinese business people who have studied abroad understand how to do business for the long term rather than for immediate and dishonest gain.

20. Company Seal- Always with You.
In China documents can be signed and stamped with the company seal. Back home contracts would not be valid unless you have signed them. Here the company seal is enough to make a contract valid … so
!Tip: Never leave your Legal Representative seal with somebody else. If you absolutely need to, be sure you can trust that person 100% as that seal is equivalent to your own signature.

21. Be ready to test your endurance
Experience: My Chinese partner was responsible for my house utilities. Once I was left without power for several days, another time I had no running water for three days. I also got internet connection discontinued.
People around me also suffered. I went through three finance managers who left the company shortly after I hired them. I remember the case of one of them who would systematically arrive at the canteen to be told there was no food for him. These are highly paid professionals who have no interest in going through that hell when they can have a nice well paid job somewhere else.
!Tip: I think when you have reached this stage, things are going really bad. In this case, it could be safest to control your house contract and utilities directly (probably through somebody you trust).

22. Beware of direct communication between your partner and your headquarters.
When you start proving to be a “damned nuisance” in your partner’s life he may try to get rid of you in different ways. He may contact your headquarters and try to make you look like inept or make them believe you complicate your life (and everybody else´s) with non-existent problems and issues.
Experience: In my case the Chinese partner kept calling my company’s president and emailing the board of directors in order to undermine their trust in me. I was very lucky because in the end I managed to get access to all sort of documents that proved we were being ripped off. But I’ve later on met other people who lost their positions due to pressure from the Chinese partner.
!Tip: Invest in “Educating your Headquarters” before you start operating in China. Headquarters don’t like to hear bad news. And some of the stories you will tell them are so unbelievable that they may end up thinking you have gone China-mad.

So what are your tips and experiences in Chinese joint ventures? You can leave a comment or contact me to share it in a longer form!

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A China Joint Venture Survival Guide. 22 Facts and 22 Practical Tips.

Joint-Ventures (J-V) in China can go well, and can also go very wrong. When the latter is the case, problems come up from where you less expect them. “Mike Smith” (not his real name) spent two years in rural China supervising his employer’s interest in a Chinese joint venture where they were the majority partner (deal signed before he landed there). His case falls within the second category I’ve mentioned (I would in fact say that all that could go wrong went wrong) but that has given him invaluable lessons on how to ensure things are done right. He has also met on the way a number of joint-ventures facing quite similar challenges to the ones he experienced.

We met to talk about his time representing the foreign partner and I’ve drafted a series entitled “A Joint-Venture Survival Guide” composed of three posts based on his experiences, opinions, tips and comments .

A Joint-Venture Survival Guide (I).(First 8 Facts and 5 Tips)

Some introductory thoughts
1. China is a noble and good society… but when it comes to doing business, the value system changes. Ripping off a foreigner may be seen as a clever thing rather than a bad one.

2. Beijing, Shanghai and Guangzhou are in a universe of their own. Drive just 100 km away into central China and reality changes. It is a hardship environment and corruption is readily encountered.

3. You may have successfully set up joint-ventures and businesses in other countries. Do not assume China is going to be the same. You are lost without an expert if you are going to deal with a local partner.
“My company had successfully set up J-Vs across the world, and nowhere did they face the situations they faced here. They assumed they knew it all, and that was a big mistake”.

“The Essentials”
4. The foundations for your success will be laid before you sign the deal.
Preliminary work is essential, and I cannot stress this enough. Once you have signed you are helpless. And later on, once your million dollars are in China, you will not be able to get them out unless you exit the J-V. There is plenty of room for disaster so make sure you dig into every single hole to figure out where the problems may be.
! Tip: This is the time to get as much information as you need. You need to be able to access all books, information about operational manual, … You may hear the somewhat overused sentence “What is the problem? Don´t you trust me?”. Well it is not about trust, it is about business, and companies that have nothing to hide will share the information with you.

5.Confidentiality and know-how protection will be difficult in a small cities. All the legal issues about this will be judged in the city in which it happens, which means that if you have a company in Shanghai and someone “copies” your product in Ningxia, the legal procedure will be carried out in Ningxia so you will be dealing with all the difficulties of operating in a place that is not a business hub.
! Tip: We are a European SME. If that is also your case you canhave free brief advice from the European Chambers of Commerce. Also a free advice for intellectual property, copy right, etc in China IPR SME Helpdesk.

6. A GOOD consultant/advisor: Priceless.
You need real in-depth expertise to pull this one off successfully:
! Tip: “J-V conflict resolution and dissolution in China is really complicated compared to other countries. Consultant/Advisor companies have an instinct for knowing the real situation”

7.[On consultants] … But find the one suited to your size
“The reality on the ground for SMEs is quite different to that of MNCs. We don’t have their leverage and muscle power and we deal with different issues/situations. It is essential to get on board a very good consultant but I wouldn’t recommend one of the big ones. I think they are better suited for big companies.”
! Tip: MNCs are often interested in high tech, setting up R + D centres, the pharmaceutical industry, medical issues and they will find some decent protection from the Local Government. In the case of SMEs that do business outside big business hubs, protection will be very difficult to guarantee and there will be unimaginable issues unless they hire the right consultant/advisor. And believe me, consultant/advisor big names will not help you to find the back door of your J-V.

8. Sign the right “pre-nup”
You obviously don’t want your relationship to go wrong, but if things happen you need to have put in place the right “break-up” conditions.
! Tip: Always use the Chinese or Hong Kong Arbitration Court. Most companies feel more comfortable with international arbitration, but what do you do when your Chinese partner doesn’t show up or doesn’t comply with the resolution? It needs to be done in China or Hong Kong where the resolution will be mandatory and enforceable.

Coming soon “A Joint-Venture Survival Guide (II)” with more interesting and useful tips to help you navigate a J-V negotiation.

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Retail in China (III): 10 Expert Tips to Help a Successful Set Up

This is the third post in collaboration with Angela López Molina, corporate lawyer at DS AVOCATS in Shanghai. You may read our previous posts on Retail in China in the following links:
Retail in China (I): Choosing your Business Model (Distributor/ Agent/ Franchise)

– Retail in China (II): Choosing your Business Model (Corner/ Shop / Internet)

Retail in China (III): 10 Expert Tips to Help a Successful Set Up

Before we start operating retail activities in China, there are a few things we should know as they may affect our business success.

1. Register brands /patents as soon as you decide to enter the market
Chinese distributors often “believe” they have the right to register the brands they are marketing. This is the reason why we recommend brand or patent registration as soon as a company starts considering doing business in China, and definitely before they start contacting potential distributors. Although it is a lengthy process (at times it may take up to 2 years) the application grants priority to the first applicant. Intellectual and industrial property protection may not be easy in China, but enforcement has been improving lately.

2.- Choose carefully your brand’s Chinese name… and register it
The brand’s Chinese name should not just be a phonetic rendition of the original brand, it should also be adequate to the image we want our products to communicate. Some distributors may refuse to market our products unless they have a suitable Chinese name.

3.- Become familiar with Chinese negotiation tactics
Chinese negotiation style is quite different from the Western style to which we are so used. When negotiating a contract in China, you will often encounter situations like this (just to mention a few):
* your Chinese partner tries to re-negotiate points that have already been agreed upon

* you see yourself interacting with a number of negotiators and you are not too clear who is the real decision-maker

* a company representative is flying into China to sign an agreement and the Chinese party waits until the last day to raise important issues, so as to get them solved to their advantage (they are the masters of the “time factor”).

All this can easily generate frustration and uneasiness, but understanding the Chinese negotiation tactics will help you be better prepared.  We can’t give a “negotiation course” in two lines, but we can advise the following:
3.1) Expect long negotiations (and renegotiations) – so make allowance for delays in your timelines.
3.2) Try to keep your cool.
3.3) Try to assess who is the decision maker.
3.4) Evaluate how much information you need to release (Information is Power: the other party should not be clear about your constraints or when you are reaching your final deadline …)
3.5) Brief your organisation back home about “the Chinese way” so that they are ready in case any contingencies arise.

4.- Get adequate / sufficient information about your potential distributor or partner
Get a financial report about your potential partner, so that you can verify who they really are, what are all their business lines, whether they can become competition to your business, if they have the required business licences, what their experience is … And it is always advisable to visit their offices, warehouses and/or factories (do not rely on a website, which may contain false information).

5.- Don’t rely 100% on the Chinese partner to follow all the administrative processes/steps
Often companies delegate all the administrative, legal or tax procedures to the Chinese partner. It is important not to blindly trust that all procedures and licences are in place, to avoid later surprises like product being stopped at customs, fines, tax issues, etc. …

6.- Ensure your potential partner’s alignment with your business mission
Companies need to ensure the Chinese partner or distributor understands and shares your business vision and objectives, so that all efforts are focused on achievement rather than re-discussing everything all over again.

7.- Customize your product to local demand
Before we hit the market, we should research consumer reaction to our products. A lot of international brands have adapted their products to better suit the Chinese consumer and guarantee success (e.g. MacDonalds has customised menus for its franchises around the world).

8.- Set the right price point &be conservative about it
The Chinese consumer is very price sensitive and will not pay a premium price unless there is a clear selling point / advantage (quality, brand image …). We tend to recommend avoiding very premium price points in initial stages (unless very clearly justified), to devise loyalty programs (discount cards, VIP promotions …) and to invest in marketing.

9.- Watch out for the internet response
China has the highest number of cybernauts in the world, and they are also extremely engaged in forums, blogs and other internet social networks. This also includes those forums where products and brands go under scrutiny / review. Companies should ensure that the internet is part of their marketing strategy, as a mistake in their brand positioning may affect their reputation / business.

10.- Include location as a factor in your overall China strategy
Another decision that companies need to make is where to locate their retail businesses: tier 1 cities like Shanghai, Beijing or Guangzhou, or tier 2 and 3 cities. Companies like Nike or Adidas started marketing their products in Shanghai and Beijing and have now progressed into tier 2 cities. Other brands have followed the opposite strategy, for example the Chinese brand “Peak” started by capturing the smallest municipalities and has been adding market share through medium range products.

Another example would be the Chinese brand Eno. They follow different strategies in tier 1 and 2 cities. Their objective in tier 1 cities is to improve / build brand image, while they make money in tier 2 cities where costs are lower. Quoting Eno’s founder, Renee Hartman, “look pretty in tier 1 cities, make money in tiers 2 and 3”. Their products, designed for a young urban consumer, have succeeded in that market segment and the company was selected “most innovative”company in China” by Fast Company Magazine.

 

Would you like to add your tips?

Basic Steps to Form a WFOE in China

If you are considering to set up a Wholly Foreign Owned Entity (WFOE) in China, the China Law Blog has just published a very good post that takes you through the basic steps that you will need to follow to form this type of entity.

I think this is a good post to recommend because a lot of foreign entrepreneurs choose to form a WFOE to stablish their presence in China. WFOEs allow you to keep full control and ownership of the operation and it also makes IP protection easier -hence it has become the preferred vehicle to enter this market.

Bellow you can read a recap of the China Law Blog recommendations and steps (you can read the complete post here, and if you still don´t subscribe to their blog I highly recommend you to do it):

1. Make sure your business is legal for foreigners.

2. Provide the required documentation: proof of the company being a duly formed and validly existing corporation or Limited Liability company in its home country.

3. Investor Documents Needed:

a) articles of incorporation or equivalent

b) business license, both national and local

c) certificate of status or a notarized copy of the Corporate Register for the investor or similar document

d) bank letter attesting to the account status of the investor company

e) description of the investor’s business activities (in Chinese)

4. Consider forming a Special Purpose Company to own the WFOE. It is common to form a Hong Kong company for this purpose and there are often tax benefits.

5. Secure Chinese Government approval.(and they remind you that in China, approval of the project by the relevant government authority is an integral part of the company registration process and you risk not being able to register if the project is not approved) . 

6. Documents to be submitted in order to achieve Chinese Government approval:

a) articles of association (which will determine issues like stablishing directors, local management, local address, special rules on scope of authority of local managers, company address, and registered capital)…
Note from Foreign Entrepreneurs in China: you need to devote special care to this part. The articles of association are one of the most important set of documents you will be preparing. The articles of association include articles like “business scope” which needs to truly reflect any type fo activity you are planning, as you will not be able to operate out of its limits.

b) feasibility study (in Chinese).

c) a lease. ( an agreement for all required leases must be provided)

7. Other documents that you will be requested: proposed personnel salary and benefit budget. And any other documentation required for the specific business proposed.

8. Approval process: 2-5 months for governmental approval, depending on the location of the project and its size and scope.

And just to finalize this post I will remind you what most entrepreneurs tell me in their interviews: “Get good advisors”. The people who help you navigate the set up of your company in China can make a huge difference.

More recommended reading: Take a look to our post entitled “Setting Up a Representative Office in China: 10 Steps and some Practical Tips”. Although it was produced with R.O.s in mind, it still provides very good tips that apply to other type of entities.

Retail in China (I): Choosing your Business Model

Has the Chinese retail boom lured you to consider this market for your products? You are not alone. The rapid growth of the Chinese middle class is increasing this market’s attractiveness. AmCham 2010-2011 China Business Report shows Retail performs highest in all indicators analyzed in their survey (Success, Confidence, Welcoming).

I had been wanting to write a series about retailing in China so when I met Angela López Molina, corporate lawyer at DS AVOCATS in Shanghai, I thought she would be the right expert to contribute to a series of articles on the topic.

We will divide this topic into the following 3 posts:
Retail in China (I): Choosing your Business Model (Distributor/ Agent/ Franchise)
Retail in China (II): Choosing your Business Model (Corner/ Shop / Internet)
Retail in China (III): 10 Expert Tips to Help a Successful Set Up

(*Update: this series has now been completed. Links provided at the end of this article)

And today we will kick off with Retail in China (I): Choosing your Business Model 

1. DISTRIBUTORS & AGENTS:
Selling your products through distributors or agents is the “easiest” way to penetrate the Chinese market. It does not require a high investment and it allows assessment of the Chinese consumer’s reaction to your product.
It is not free of risks, though, as you may find yourself in the middle of a chaotic distribution network that is difficult to control.

a) Distributor vs Agent: Different Roles/Responsibilities
– Distributors buy and sell the products; their profit is the difference.
– Agents act in the name and on behalf of the foreign investor; they receive commissions on sales.
– Degree of trust: The agent generally enjoys a higher degree of independence and is able to change certain conditions without the explicit consent of the principal.

b) Tips on how to deal with agents/distributors in China
– Tip #1. Licences: Ensure your distributor/agent has the required licences to retail your products.
– Tip #2.  Exclusivity: Try to reduce the exclusivity territory (you may attach a map to the contract). Generally, exclusivity for all China is a bad idea.
– Tip #3. Establish sales targets and regulate your rights in case they are not met (e.g. termination or end of exclusivity).
– Tip #4. Commissions: describe clearly the calculation basis for commissions in the agency agreement.
– Tip #5IP Rights: Define the use of IP rights, promotion and publicity materials. Do not grant property on IP rights; grant instead a licence of use.
– Tip #6.  Termination: Reasons for termination are a key issue in distribution/agency contracts. Do not forget to regulate the consequences of such termination (e.g establish sale of stock to third parties / to the foreign investor, destroy / return the promotion materials, etc.).
– Tip #7. It is quite common for entrepreneurs and SMEs to initially “test the waters” with a distributor or an agent, and once they understand the market better and how their product works, they take it to the next level.

2. FRANCHISE:
a) Franchisors: Laws & Regulations
Under applicable laws and regulations, there are certain conditions imposed on franchisors in China:
– Legal form: Having a commercial company in China (JV or WFOE) or abroad. Individuals cannot establish a franchise in China.
– Previous experience: Having at least 2 own shops operated directly by the franchisor (in China or abroad), for  more than one year.
– Business model: Having a business model and the ability to render assistance and give instructions to the franchisee, as well as technical support, training and other services.
– IP rights: Having a trademark, patent or know-how (suggestion: register your IP in China).
– Registration of confidential business information: For every signed contract, franchisors must register with the competent authorities highly detailed (and usually confidential) information, such as: original franchise contract, marketing plan, franchisee manual, etc.

b) Franchisees: Some things you should know about their rights
Your Chinese franchisee has some rights that you should be well aware of:
– Your franchisee has the right to unilaterally terminate the contract without paying an indemnity if:
1) the franchisee claims that the information supplied is incomplete or untrue.
2) after a “reflection period” the franchisee decides to back out.

c) Tips on how to deal with your potential franchisee
– Tip #1. Make the franchisee sign a receipt acknowledging that the information received is complete.
– Tip #2. Clearly define in the contract how long this “reflection period” will last and try to make it as short as possible (i.e. within 1 day from the execution of the franchise contract).
– Tip #3. Enter a non-disclosure agreement (“NDA”), as you will be sharing all your business information.

d) China Franchise: Main issues
– Lack of payment by the franchisee is common; there is not a real franchise culture in China.
– Lack of confidentiality.
– Difficulty in controlling brand image.
– Legal uncertainty due to:
a) franchisee’s right to unilaterally terminate the contract.
b) reclassification risk: if, in order to avoid the disadvantages, the franchisor has established a distribution network that works as a franchise in practice, authorities may reclassify the legal relationship and impose a penalty (RMB10,000 to RMB500,000).

e) Recommendation
– If possible, enter the market initially managing your own stores, so that you can fully understand the market before you start granting franchises.

f) Conclusion
For obvious reasons, the franchise regime is very restrictive for franchisors and inevitably favours franchisees. As a result, some companies establish a distribution network that works de facto as a franchise. As we have pointed out, there is a risk of reclassification into franchise and the consequent sanction. In addition, in the new draft of the Catalogue for Foreign Investment (which regulates which are the encouraged, permitted, restricted and prohibited activities to be carried out by foreigners in China), the franchising business is now encouraged, which make us think that in the future the regime will be less restrictive and more favourable for foreign investors.

Would you like to share your retail experience?

Update: This series has now been completed. All the links shown bellow.

* Retail in China(I): Choosing your Business Model (Distributor, Agent, Franchise)
Retail in China (II): Choosing your Business Model (Corner, Shop Lease, Internet)
Retail in China (III): 10 Expert Tips to Help a Succesful Set Up

China Business Strategy: “FOCUS!”… Don’t chase it all

Second post based on insights from an interview to David Caselli, CEO New Zealand China Direct Ltd, a New Zealand owned WFOE importing and distributing food and beverages into the Chinese market. In this post, Mr. Caselli explains how he took over a diverse business without a clear focus or scope and applied his business know-how and market insights to reformulate the strategy and establish a focused business model.

Key Message on Business Strategy:
This country is huge and there are a lot of business opportunities, but you need to focus on your best business opportunity (and sometimes on key markets) so that you can capitalize on all your business efforts, networking, channels, market insights…

Excerpts from the interview
From “Everything All Over to 3 Businesses/3 Markets”
“When I took over this project the business had been in China for 2 years. It was professing to do all type of products (timber, steel, fluffy slipers, food &beverages..) all over China. I looked at that business and saw we could not possibly succeed. So we went from everything all over the country to three businesses in three provinces.
We identified food & beverage, timber & construction and specialized manufacturing as key businesses. And we selected Shanghai, Suzhou & Hangzhou as our target markets.”
From “3 Businesses/3 Markets to 1 Business/1 Market”
“We worked the model for six months but very quickly concluded it was still too much. This is a huge country, very specialized. We narrowed from three to one business, food & beverages, and focused on one market, Shanghai.
Once you focus on that one business you start selling a lot more of food & beverages. This is a country where people create billion dollar businesses from just selling water.”
Key Lesson: Focus to Capitalize on Strengths, Efforts and Market Insights
“Focusing on one business enables us to play product by product to the strengths of the country. Some products will just be imported, bought and eaten as they are. Some products need to be imported and then processed (processed here so that they fit local taste), and then distributed. An example would be low end meat cuts (read more on this topic in his previous interview). Other products could even be imported, processed here and exported to other countries in the world.
So this focus on food &beverages allows us to do many things, and explore which ones are the winners for us to concentrate.

China Stories: Choosing the Wrong Company Formation Agent could Kill your Business!

Last week I had lunch with Andrea, who set up what was initially proving to be a successful business and saw it dying due to the wrong agent choice.

Andrea (and her business partner) learnt today’s tip the hard way… And she was kind enough to share it with us so that “beginner entrepreneurs” (as she describes herself at that time) don’t fall into the same trap.

Tip: Make sure you choose the right company formation agent.
– Get references that confirm their good work (or hire a reputed firm)
– Ensure they know your industry well

Story: “Go Nuts Healthy Gourmet Snack Bar” was an organic/healthy snack bar selling “Go Nuts” branded pre-packed products and in-store prepared food (sandwiches, granola/nut assortments, salads…). It was set to be quite a successful business. It quickly got a loyal clientele thanks to a unique offering and a good location (Jing An district in Shanghai).

But “Go Nuts” was also the best case study I’ve heard of how things can go absolutely wrong if you chose the wrong agent…. Not once, but TWICE!

1st Agent: It all started wrong. First agent was identified through a local expat magazine in Shanghai, City Weekend…. To cut the story short, the guy took the money and did nothing… Andrea describes him as an “impostor”.

2nd Agent: Here things went well… initially, but after 3 months operating the shop the local authorities came in for an inspection and were sorry to inform that “they needed to close the shop because the business scope did not allow them to run that type of activity”.
It turned out the business license only allowed them to sell pre-packed food & beverages. Most of their business was coming from the in-store prepared food. When they confronted their Chinese (first one was foreign) company formation agent the guy said:
“It is not my mistake, it is yours, because you chose me to do this job and I have never done food & beverage”
As you have already imagined the agent only gave them this piece of information after their shop had been closed with a 200.000 RMB fine.

As young entrepreneurs without a strong financial support their cash was gone (spent on licenses, rental, perishable food stock that went wasted, fines …). They felt there was too much uncertainty ahead (would they get the right agent, would the licenses be granted,…) and decided to close the shop.

So a few lessons learnt for the future:

1. Make sure you choose the right company formation agent.
– Get references that confirm their good work (or hire a reputed firm)
– Ensure they know your industry well

2. You MUST know what your license documents say… so be sure to have an English translation (even if you can’t use it for legal purposes). And please, get a good translation …don’t ask your neighbor or a friend to read it to you! Get the document from your agent or get a professional translator to do it.