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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36 Tips on How to Deal or Negotiate with your Chinese Suppliers

During the last year, I have interviewed several entrepreneurs who source products from Chinese factories. Their tips and insights are scattered across a number of posts (and a few of them I’ve not even published). Today I am going to compile most of the tips I’ve heard so far on how to deal / negotiate with Chinese suppliers ( I say most because I am probably forgetting a few). Here is the check-list:

LOOKING FOR SUPPLIERS…
Tip #1. Initial Search for Suppliers: directories, trade-show directories and internet
Tip #2. Not all good suppliers have English websites, get on board somebody who can help you search in Chinese
Tip #3. Existing (good) suppliers may be able to help expand your supplier network in non-competing products
Tip #4. If there is any IP involved, register it in China before you approach anybody
Tip #5. Consider registering your IP for categories similar to the one you manufacture

SHORTLISTING SUPPLIERS
Tip #6. Approach them first with an introductory email presenting yourself, your company and detailing as much as possible the product you are after
Tip #7. If they do not answer fast (1-3 days) move on, they will give you trouble in the future
Tip #8. If you have a good number of suppliers to choose from, create a “pre-selection system” that helps you shortlist: level of response to your introductory e-mail response, telephone check (do they exist?), factory address provided, factory license, any certification your business requires, quality certifications…
Tip #9. Ensure you are not dealing with the middle man (I): Visit the factory… ALWAYS!
Tip #10. If you can’t visit the factory, get an Inspection Company to do it for you. It is not that expensive

NEGOTIATING WITH YOUR SELECTED SUPPLIERS
Tip #11. If you are not a fluent Chinese speaker, bring a native Chinese speaker to the negotiation- he/she will be a valuable support
Tip #12. Understand perfectly the production process
Tip #13. Be very clear on who is going to be making decisions
Tip #14. The best way to do business in China is face-to-face” Technology is great, but I do not think it is the way Chinese people are wired to work
Tip #15. “I can’t” is not in their vocabulary, so be wary if you get silence for an answer…
Tip #16. Make them recap the agreements, do not assume they understood just because you feel you were clear enough”
Tip #17. Give realistic purchase estimates. If you promise 10 more times than you are planning to buy, they will cut corners to meet their profit so it will hit you back with poor quality (they work on small margins)
Tip #18. Expect long negotiations: even points that have already been agreed will be raised again in the future
Tip #19. Pricing: Do not get obsessed with the cheapest deal. Quality has a price and you should also consider that.
Tip #20. Track commodity prices used in your products
Tip #21. Learn about your suppliers cost structure (how much goes into labor, materials cost…),
Tip #22 . If your IP is involved, make sure they agree to sign a good non disclosure agreement, with non use / non circumvention  provisions (I read this one at the China Law Blog- worth reading the whole post about it)
Tip #23. Make sure you have good contracts in place. It will be a good use of your money to get a China knowledgeable lawyer to draft them (so that the terms are enforceable and it covers all the points you need to cover- IP, stocks, product quality, product specifications, penalties, etc)
Tip #24. Ensure they have the machinery & capability to produce your product. Ask them to produce a few samples in front of you, even if they don’t match your exact specifications.

PRODUCTION & SHIPMENT
Tip #25. Make sure you visit the factory during product development. It will speed the process, as nobody will tell you on the phone when they’ve got stuck with something (especially if the product is technically sophisticated)
Tip #26. Visit the factory during production & for quality control
Tip #27. If you can’t visit factory send an inspection company or somebody you trust (and is qualified for the job)
Tip #28. Don’t pay till you are sure all the product is in good condition (make sure the contract is draft that way)
Tip # 29. Never relax! Even with good suppliers. “Quality Control: Always, even with good established suppliers”
Tip #30. Always be ready with back up options- you would be surprised about how many last minutes surprises happen
Tip #31. Expect Delays in your Supply Schedule (power shortages are common, national holidays…)
Tip #32. “Problems don’t finish after production. Supervise Logistic Paperwork! There are often mistakes that will get your shipment stuck

…ON-GOING RELATIONSHIP
Tip #33. Payment Terms… Some buyers feel that, once you build the business relationship,  things get easier (ex. Not requiring advanced payments)
Tip #34. Get rid of unreliable suppliers A.S.A.P. If they trick you once, it will happen again
Tip #35. Take care of good suppliers, they are not easy to find. Look for win-win when problems come up.
Tip #36. “Renegotiating conditions” is quite common. Your Chinese supplier sees the contract as the “beginning” of the relationship. If you follow tips 20 & 21 (track commodity prices & know suppliers cost structure) you will be able to assess if there is a fair reason to give in (hopefully in future productions)

Would you like to add your tips?

Sourcing from China: Who are the “Happy Buyers”?

After a couple of years in China, I have managed to meet a good number of entrepreneurs and business people sourcing goods from Chinese suppliers. I’ve also read plenty of posts from fellow bloggers providing negotiation tips and often narrating horror stories (and I’ve also shared tips and written horror stories myself!)

Last week I was chatting with somebody who is heading a representative office that helps source a number of goods to its headquarter. I soon realized this person was a satisfied buyer who surely had lots of horror stories to tell but was far from bitter about suppliers. That made me think about the people I’ve met that could be (quite simplistically) described as “happy buyers”. They all have some common characteristics.

What I’m about to write may not hold true for everybody, but I’ve come to realized that the “happy buyers” I’ve met share the following approach to business:

1. “Happy Buyers” are into building long term relationships
a) They happen to be genuinely looking for “win-win” situations because they want (and more importantly need) long term suppliers.
b) They focus on strengthening the relationship because they are aware that not having big purchase orders they need to leverage on the relationship- and with that objective in mind, they make sure that they visit their suppliers very often… because in China things don’t get done by fax.

2. “Happy Buyers” approach price negotiation very professionally
a) They understand their suppliers cost structure (how much goes into labor, materials cost…), and
b) They track commodity prices that are involved in their products
So, when a supplier comes back saying “I need to increase the price” they can:
a) Assess if there is a valid reason behind the request
b) Estimate what would be the fair cost impact
c) Objectively decide if they should give in (in future orders… not for this one!)
… All of which will positively help the long term relationship and both sides satisfaction.

And, of course, there are some other very basic things in common like having the right tools in places (contracts, good quality control…)… but for the purpose of this post I wanted to focus on the two I’ve mentioned above.

I know there will still be a lot of bad experiences out there (even when you have ticked all the above/ and even suffered by those same people I talk about)… but I am just describing what satisfied buyers that I’ve met have in common.

So, are you a “Happy Buyer”? What is your secret?

Human Resources in China: “Accept what you’ve got and model them into what you expect them to be”

I hear a lot of people complaining about things that seem to be quite common in Chinese employees.

1. Not saying the truth / Or failing to deliver what they feel are bad news
This sentence sounds quite familiar to me by now: “Lying is not an issue. It is accepted and they do not even think they are doing something wrong”.
Or the “Truth Vs Courtesy” dilemma, a different dimension to the same problem that I read about in the book  “Business Leadership in China” by Frank T. Gallo. It describes how employees often do not want to deliver bad news that may “hurt you”, “make you unhappy” or “make you lose face”.

2. Looking for a scapegoat
It seems a lot of managers believe that when a mistake is made, you need to find who is responsible and give an “exemplary punishment””.

Those are obviously behavioral patterns that you would not like in your organization…So the tip of the day could be something like:
“Accept what you’ve got and model them into what you expect them to be”

Or at least that is what entrepreneur German Torrado tries to do when he takes his new employees through their “in-job training”.

1.When it comes to saying the truth he tells me:
“Here you must acknowledge that an employee may not tell you the truth but still be loyal. Having said that, you really need to work on that, an eradicate that behavior because they may fail to tell you the truth on something unimportant today, but it may be something critical tomorrow”

“Once you identify an issue that has been hidden from you, you need to keep your cool and then deliver the message: “a director needs to be informed in order to be able to solve the issues that come up, and my expectation is that you will inform me to help me solve them””

2. And his tip for “scapegoat” syndrome:
“As part of my new managers induction, I always make a special effort to share my views/experience on how to work as a team and how to lead teams. I know middle management has been told that, when something goes wrong you need to look for the person responsible and give an exemplary punishment. That is not how I want my managers to work, so I put a lot of effort on showing them how to deal with that type of work situation.”

Do you have any insights out there to share?

Quality Control, Quality Control, Quality Control. Can you hear me loud and clear?

Last week I was reading a post on the Silk Road International Blog with some very good advice from an industry expert on how to avoid getting into trouble when sourcing from China. I have to admit that I am really surprised that companies are still missing on two very obvious steps: quality control and production audits.

I’ve been interviewing China experts for some time, and there is one single piece of advice that they never fail to mention: quality control is a must and production inspections are more than advisable, especially with new suppliers.

Here are tips & quotes from some of those interviews:

Never relax! Even with good suppliers.
Production monitoring and quality control is still critical even when you work with your most trusted suppliers! The underlying issue is that our perception of what “acceptable” means is quite different. Your supplier may candidly approach you questioning why you can’t you take a product which is not meeting your specification if it still serves the purpose…”
from my post “7 Top Tips for Entrepreneurs Starting Business in China”- Interview with LinkPoint Europe.

“Be very strict with your quality control. You will annoy them but the loss is on you if something goes wrong.
I always go to the factory when my products are being made. I don’t tell them what day or what time, I just show up. When production has finished I personally inspect the product. I randomly inspect 10 to 30% of what has been packed. I make them open the boxes and I check the product is complying with the agreed specifications. I once made them open 300 boxes because I was not completely confident about the supplier.  They obviously don’t love it, it has a cost for them, but I don’t care. The loss is on me if something goes wrong…”
from my post “5 Tips for Negotiating a Dealing with your Suppliers in China”- Interview with Dalton Asia Limited.

I randomly check 15-20% of the final production for quality control, and reject anything that does not meet the agreed specifications. It’s usually not a problem as they always have excess production.
If you are dealing with a new supplier you must go for a production inspection”- Interview with Jennifer Patton from Asian Link

These are just a few examples of what experts based here recommend. But you don’t need to be based in China to fulfil this simple requirement. There are plenty of companies providing this type of service, so one wonders why buyers are still purchasing without QC and production inspections.

Trademark Rights in China: Good News, Bad News.

A lot has been written about the status and enforcement of trademark rights in China. This is no surprise, as for some industries trademarks are a key strategic business advantage.

When it comes to trademarks in China, I like to put it this way “I have good news and bad news… which one would you like to hear first?”

The good news is that, although China has to put up with quite a negative press when it comes to respecting and enforcing IP rights (one could say well deserved), on trademark rights protection it has quite a good record of enforcement!

So what could the “bad news” be? Well, China follows a first-to-file system so, if you have not done it already, anybody could well register your mark without evidence of prior use or ownership (ouch!). So register your trademarks now (it may take between two to three years – although there were proposed law changes that hopefully could end up shortening this period) so that you don’t have a nasty surprise one of these days.

Lovells, the international business legal practice, has published in its website a “Clients Note” entitled “Pre-emptive intellectual property rights management in China” in which they highlight what they call the “hijacking of IP rights”.  I’ll summarize it for you: “somebody registers your rights and then takes legal action against you for IP rights infringement … because you are obviously making use of your own rights!”

The document also shares a real life example in which things went really wrong for an unnamed US Company. A former distributor registered this company’s trademark and ended up:

  • Filing trademark infringement complaints in several Chinese cities
  • Getting all production plants sealed
  • Getting product seized by administrative authorities and
  • Achieving an administrative order ordering the US Company to stop using its own trademark…

You can breathe now. It has a happy ending. But my point is that those things happen. And as Douglas Clark, a partner in this same law firm, mentioned in a lecture on Intellectual Property at CEIBS Executive Forum on April 6th, his firm gets 5 to 6 cases like this every year.

You may be thinking now that you don’t sell your products in China, but that does not take you to safer ground. Check out the China Law Blog for some basic tips on outsourcing … and do not miss the part in which they mention that you could even be prohibited from exporting your own product from China!

I hope I did not leave you too worried… for peace of mind, you can just log onto the Trademark Office of the State Administration for Industry and Commerce (CTMO)

http://www.ctmo.gov.cn/english/index_e.asp

And browse in the link bellow to see if you find your trademark there….

http://202.108.90.72/trade-e/index.jsp

Hope not… unless you are registering it yourself!

Do you have any experience to share?

Setting Up a Representative Office in China (III): Less Exemptions and More Taxes! The New Tax Treatment is here!

Considering setting up a Representative Office (R.O.) in China? You may need to revise your numbers.
The Notice from the State Administration for Industry and Commerce and the Ministry of Public Security “Further Strengthening the Administration on Registration of Resident Representative Offices of Foreign Enterprises” (Jan 4th, 2010)[1] is not the only cloud on your horizon. On February 20th 2010 the State Administration of Taxation (SAT) issued a circular announcing the new tax treatment for foreign R.O.s “Tentative Measures for the Administration of Taxation on Representative Offices of Foreign Enterprises” (Guoshuifa[2010] No.18 (Circular 18)) [2].

Two main changes are worth highlighting:

  1. Exemptions
    Local tax authorities are requested to review existing tax exemptions granted under the old rules.  Till now, R.O.s’ expenses related to activities like market research, liaison and other preparatory sales and manufacturing activities for their head offices products could enjoy tax exemptions. And it is believed that often R.O.s were getting exemptions even if their expenses did not fall into these categories.
    Under the new tax treatment, exemptions will only be applicable if there is a relevant tax treaty or agreement.
    … So, reassess your situation, and if you believe you still qualify apply a.s.a.p.
  2. Deemed profit rate increase from the current 10% to a minimum of 15% of the operating expenses (when using the cost-plus method/ for R.O.s that can accurately detail expenses)
    Deloitte has published in its China newsletter a very comprehensive analysis that shows that this change in the taxable income ratio will mean an increase in tax costs of no less than 24% (you can read the detailed analysis in the link at footnote # 2).
    And the most confusing part here is that this 15% that everybody is now hoping for is just “a minimum”. So one wonders how will the local tax authorities evaluate whether an R.O. ‘s profit should be deemed 15% or 50% …

These changes will definitely affect companies deciding or reassessing what legal entity best works for their China business. Ana Inchausti, from Inventta, also touched on that point when I approached her for my previous post on how SAIC’s new regulations would be affecting R.O.s. I quote bellow a summary of her comments on the tax changes:

“…To the question if we still consider R.O.s a practical approach to establish businesses in China, we would say yes, R.O.s are still an interesting approach but maybe to a more reduced group of projects than in the past. The tax increase is, in our opinion, the major change affecting the decision making process…We would advice our clients to set up a R.O when they are going to keep a small medium structure with low costs and just a few employees and overall if, after doing the math, to pay tax based on their expenses is still more interesting and competitive than to pay a profit based tax, as its compulsory to the WOFEs.”

These next two weeks are going to be very interesting. R.O.s will be submitting their quarterly EIT (Enterprise Income Tax) and BT (Business Tax) for the first time under the new regulations so there may be not-so-nice surprises. I’m planning to follow up with some R.O.s to find out what these changes have meant to them. Maybe it is time to go WFOE!

Would you like to share how the new regulations are affecting your R.O.?


[1] Link to the State Administration for Industry & Commerce of the People’s Republic of China. Notice of changes in Registration of Foreign Representative Offices – English reference translations:
http://202.108.90.68/nd/100108143617-0.htm

[2] Deloitte Tax Analysis on the new Tax Treatment issued by SAT “Tentative Measures for the Administration of Taxation on Representative Offices of Foreign Entreprises” (Guoshuifa[2010] No.18 (Circular 18))
http://www.deloitte.com/assets/Dcom-China/Local%20Assets/Documents/Services/Tax/TaxNewsletterEN2010/cn_tax_tap1012010eng_080310.pdf

Setting Up a Representative Office in China (II): New Regulations further Restrictions

Considering setting up a Representative Office (R.O.) in China? There are a few things you should know.

R.O.s are getting a lot of attention this year, as China’s State Administration for Industry and Commerce (SAIC) issued in January new regulations that further restrict their activity[1]. These regulations are already being implemented in Shanghai and are said to be on the way for the rest of China.

I must admit that every time I read about R.O.s, commentators highlight their limitations and the hassle involved in switching to another form of legal entity, if needed later on. So consultants tend nowadays to favour the establishment of WFOEs (Wholly Foreign Owned Enterprises) as a better long term option if you are committed to a project in China.

I read about these new regulations right after I had finished interviewing Barbara Cisneros from INAEL Electrical Systems SA  on the topic of how to set up a Representative Office (R.O.) and I must admit I feared I was about to produce an “obsolete” blog post even before posting it on line. But then, I decided to go ahead with that post and further explore the new situation with Ana Inchausti, from Inventta, a consulting company specialized in internationalization projects in Asia.

Before I jump into her feedback, I will recap the main changes that these new rules mean for R.O.s:

  • The foreign company must prove that they have existed for at least two years (ouch! for newly created companies that would like to operate here…)
  • Registration Certificate will be valid for only one year (in the past it could extend up to three years)
  • Foreign employees, who will all hold the position of “representative”, will be limited to a total of four only. This includes the Chief Representative of the office.

And I will also summarize the main advantages and limitations traditionally attributed to R.O.s:
Advantages:

  • It is the fastest option to set up locally, it just takes between 2 and 3 months, once all the paperwork is ready
  • It is cheaper than creating a WFOE, as you need NO capital to establish.
  • It allows you a presence in China and hence better perform a series of non-profit making activities (like market intelligence, business relationships, better access to suppliers, “introducing products” (not directly selling them or invoicing) or being able to give technical support/coaching on those products).

Limitations:

  • You cannot place orders or produce invoices, in a nutshell, you cannot do anything that may represent a profit making activity (all that needs to be done from headquarters)
  • You cannot employ staff directly (you have to go through the government employment agency)

Interview to Ana Inchausti, from Inventta (by e-mail).

  1. Do you still consider R.O.s a practical option to establish here?
    R.O.s have been traditionally the most common investment vehicles in China since foreign companies were allowed to set up legal entities in the country. During some years it’s been the best choice to enter in the market in a quick and cost-efficient way. Keeping in mind that no capital investment is required, many investors have been strongly attracted by this legal form to set up their business here.
    After the new regulation came into force in 2010, the general context has changed and to some business, R.O.s might not be the most interesting way to go; to others, it’s simply not possible to set up R.O.s because they no longer qualify to pass the approval and examination of the authorities …… The obligation to the foreign company to prove that it has existed  for more than 2 years in their countries of origin and the limitation to hire more than a certain number of foreign employees are making R.O.s a non available option to many investors, even if it was their choice in the first place.
    However, at Inventta, we analyze our clients’ investment and business plans on a case by case base; and we are still advising this kind of structure in some specific cases where all the new regulations are not having great impact . We consider all the aspects involved in a business, not only the registration or the start up periods to which many of the changes introduced apply, but we also bear in mind the future life and needs of the business.
    To the question if we still consider R.O.s a practical approach to establish businesses in China, we would say yes, R.O.s are still an interesting approach but maybe to a more reduced group of projects than in the past.
    …… We would not advice to choose a R.O.s as an investment structure to companies that may need to hire more than 4 foreign employees (which it is not allowed any more), to companies that will have great expenses (for example: rental, salaries, business trips…etc) because the tax is paid taking the monthly expenses as the tax base, and, obviously, to companies that need to issue “fa piao” (invoices) to their clients.

  2. Which type of company do you recommend this approach to?
    We would advice our clients to set up a R.O when they are going to keep a small medium structure with low costs and just a few employees and overall if, after doing the math, to pay tax based on their expenses is still more interesting and competitive than to pay a profit based tax, as its compulsory to the WOFEs.

  3. Do new regulations change the way you will be advising your clients?
    The new regulation came into force in January 2010 and, as in many occasions, without too much pre advice, so we all had to adapt our advising and strategy methods to make sure we are covering our clients’ needs. On the other hand, all investors had to changed their business plans to adapt their projects to the new legal frame affecting foreign corporate establishment in China.

So, now my question goes to the blog readers. Are the new regulations going to affect your activity as a Representative Office?


[1] Link to the State Administration for Industry & Commerce of the People’s Republic of China
Notice of changes in Registration of Foreign Representative Offices – English reference translations:
http://202.108.90.68/nd/100108143617-0.htm

Other English sources for this information:
http://www.picozzimorigi.cn/main/reports.php?id=30

http://www.martindale.com/government/article_Sheppard-Mullin-Richter-Hampton-LLP_916678.htm

Setting Up a Representative Office in China (I): 10 Steps and Some Practical Tips

Considering setting up a Representative Office (R.O.) in China? Barbara Cisneros from INAEL Electrical Systems SA takes us through the steps she followed and gives us some tips based on her experience setting up in Shanghai in 2008.

1. – Obtaining the License.
Tip: Get somebody to guide you through the licensing and legal process.
Experience: There is a huge load of paperwork and you will not be able to do it on your own. In our case, we hired a Spanish law firm with an office here, as we also needed to legalize/authenticate paperwork for Spain. Once you have all the paperwork ready the process may take 2 to 3 months (at least in our case!)

2. – Designation of a Chief Representative.
In order to be able to start operating you MUST designate a Chief Representative for the R.O. This person will hold legal authority and will be legally liable. The Chief Representative will also pay taxes in China.

3. – Registering with the Tax Bureau.
As R.O.s don’t make profits, the Government has devised another way to get some money out of us. We are charged a percentage of the expenses our office incurs, including wages, rental, etc… I believe this percentage may vary depending on which city you live in, jurisdiction, municipality, district… In our case we pay 10% of our expenses.
Tip: I go back here to my first tip “get somebody to guide you”.
Experience:
The law firm that navigated us through the licensing process also took care of this.

4. – Accounting.  Somebody in your Team or Outsourcing?
As soon as you get your license you must start paying taxes. You pay the income tax monthly and the office taxes every three months.
Tip: (This tip is for very small R.O.s like ours (just me and a local employee.)) Unless you have hired somebody with an accounting background who additionally, and this is very important, has good contacts at the tax bureau, then I would recommend outsourcing it to an accounting firm.
Experience: In our case I decided to hire somebody with a bit of an engineering background so that she could help with my work beyond just picking up the phone. I outsourced the accounting tasks to an accounting firm.
There are plenty of companies, both multinational and local, that can do this for you. … When you are a very small company you don’t have the budgets a big multinational may be expecting from a client… so I contacted a local firm for which I had got very good references. It is working really well for us and my contact there speaks perfect English.
Extra Tip: It will save you some money if you include the cost of the annual audit in the accounting fee.
Experience: During the first three months of each year, the R.O. is audited for the previous year activity. This is done by special companies licensed to provide this service. I was aware it would have an extra cost so I negotiated the inclusion of this cost in our accounting fee.
The auditors are very thorough. I was surprise that they devoted four hours to such a small office as ours.

5. – Recruitment.
Tip:
You may choose whom you hire but you cannot complete the recruitment process directly.
Experience
: One of the limitations a representative office has is its inability to recruit directly. Instead you need to use an employment agency that has a license to provide this service. When I set up the office I was told the only available option was FESCO (Foreign Enterprise Human Resource Service Co). I’ve been told that there are a few more options now.
In my case, my boss already knew a good person for the job, so I interviewed her and passed the information to FESCO so that we could complete the recruitment process through them.

6. – Opening a Bank Account.
Experience: My Chinese staff and I visited several banks. We were taken through all the relevant information, account types, processes and fees, and with all that info in hand I made my decision.

7. – Looking for an Office.
You cannot just set up a Representative Office anywhere you want. The location/building needs to have a certain type of classification. A Chinese company can set up in locations we are not allowed to.
Tip: Study carefully all services that should be included in the office tenancy agreement (building management fees, official invoice…) as they may represent an unexpected extra cost afterwards.
Experience:
We were very lucky. There were offices available in the same building where our law firm was. We benchmarked with offices in some other locations in Shanghai and we realized the deal was good.

8. – Office Renovation … the office may need a bit of renovation before you move in….
Tip: Get somebody to manage it for you. Get a recommendation for somebody trustworthy! It may have an extra cost but it is the most efficient way to do it and it will pay back!
Experience: I had to travel and just couldn’t be on top of every step of the process (plumbing, wiring…). The Chamber of Commerce recommended somebody who “tailor-made” a project for me. I chose some office furniture, I even told him how I wanted the wiring, where the internet and the electricity sockets should go … and he managed everything for me.

9. – Becoming Operational_Office Services.
In our case we had to get telephone and internet installed. Usually other services like electricity and water are already provided by the office management.
Experience: The exact same internet service had different quotes depending on the source…You always feel there is something better out there, but you just need to focus on making a choice with the best information available so that you can become operational a.s.a.p.

10. – Becoming Operational_Office Supplies.
You obviously need office supplies, including computers.
Tip: Outsource anything which may distract your attention from your key tasks, especially those jobs for which specialized service is available, like information technology.
Experience: I got a contact for somebody who was doing computer maintenance/ IT support for another office.  I briefed him on what type of computer we needed, the quotes I had already got, and where I had checked them out… I requested him to take care of everything, from buying to set up. This person now provides us with IT support on demand and makes sure everything runs properly.

Have you set up a Rep. Office in China? Would you like to share your experience?