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?

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Buying Out Your Chinese Supplier?

China Law Blog has published a post about foreign companies that try to buy out their Chinese suppliers. Dan Harris makes very enjoyable reading out of a very serious topic. You can read his post entitled here: “Buying A Chinese Company. Why China Deals Don´t Get Done

This is what you will learn from his article:
Very common practises for Chinese companies are:
-to under report employee wages to the government
-to underpay taxes
-to pay the rent under the table.
Which may be easy to get away with as a Chinese company but not as a WFOE.

So, if you are considering buying out your Chinese supplier, life will be a bit different for you. As a WFOE, your company will probably be wanting to play by the rules (and you better do it because as a foreign company you will be closely scrutinised) and the profits your supplier was making will be imposible to replicate as you will:
-end up paying double the amount your supplier was paying in wages and benefits
-pay all your income taxes
-have to increase booked rental costs

This is the short version. Read the original post here to get really interesting details and some cost estimates.

I will only add that it is indeed widely known that these practises are common. Some of these issues I will also mention in the second part of “A China Joint Venture Survival Guide” that is coming soon (Check my first post on the topic here)

Do you have any stories about buying out a Chinese company?

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.