Doing Business in China Guide

Establishing The Right Presence

Given China’s sheer size, complex and changing business environment, as well as culture and language barriers, it is not an easy market to enter and exit with a quick win. To succeed in China requires careful business planning and execution. Foreign companies need to take time to build up their business network and credentials and to demonstrate their commitment. Often this requires some sort of presence in the marketplace, whether directly through your own business operation, or indirectly, working through a strategic partnership such as an agent or distributor.

Agents and distributors

An agent is a company’s direct representative in a market and is paid commission, while a distributor sells products on to customers after buying them from the manufacturer – their income comes from the profits they make on the difference.

Market entry through working with an agent or distributor can have several advantages, such as reducing time and costs to market entry as well as gaining the local knowledge and network of the agent.

However, there are some drawbacks to this approach. Employing a third party results in an additional cost to your products and you may also lose some control and visibility over sales/ marketing. It also has implications for intellectual property rights protection, increasing the risk of your product being copied or counterfeited. Given the above considerations, companies need to select agents and distributors carefully.

Some of the frequently asked questions are in the following checklist - you should also conduct due diligence to verify this information:

Background

• Company size, history and ownership (private or state owned)

• Quality and quantity of the sales force

• Customer feedback and trade/bank references

Distribution channels

• Regional coverage

• Types of outlets covered and frequency of calling

• Transportation and warehousing facilities

Are they right for you?

• Does the agent/distributor have a genuine interest in representing your product?

• Can they benefit from actively promoting your interests (is it a win-win)?

• Do they also represent any competing companies/products?

• Can you communicate effectively with your counterpart?

Once a working relationship is established, the agent/ distributor need to be managed actively; this may be achieved by the following:

• Visiting as regularly as is practicable at a senior management level – this shows interest in, and commitment to, the agent and the market. This will also provide you with an opportunity to learn about conditions in the market and see how your products are faring.

• Working closely with the agent to show them how they can profit from your products.

• Helping to prepare marketing and sales plans for the agent.

• Provide regular training for the sales staff and after-sales training for the technical staff in the UK.

• Linking performance to incentives and agreeing milestone targets.

 

Establishing a permanent presence

Although it is possible to be represented through agents or distributors, many foreign companies progress to the establishment of a permanent presence in China, as their experience and confidence grow. Having a permanent presence in-market can provide several possible benefits, including:

• Market presence – showing commitment.

• Cutting out the “middle man” – direct access to the end customer/supplier.

• Direct control over corporate strategy and activities.

• Enables trading in local currency and eases the conduct of business transactions.

• Fulfils a legal requirement to have a permanent presence (relevant in certain business activities and sectors).

There are a number of structures that allow foreign invested enterprises (FIEs) to conduct various business activities. These include representative offices, joint ventures, wholly foreign-owned enterprises, and foreign invested commercial enterprises. Each of these structures has unique advantages, restrictions and drawbacks, and it is essential to choose the option best suited to your business aims.

The rules and regulations regarding foreign direct investment and FIEs have evolved gradually since China began opening up to foreign business activities. Since China’s accession to the World Trade Organisation there have been a number of amendments to regulations, easing market entry for international companies across a range of sectors.

Companies that desire a permanent presence have to set up operations as an appropriate legal entity, depending on the intended business scope, and be compliant with Chinese legal and tax requirements. It is usually more difficult to alter a business structure once a legal entity is incorporated or established, so it is vitally important to seek professional advice on your investment structure during the early stages of planning. You must fully understand your intended business activities in China (for the short and long term), whether they are practicable, any legal and sector barriers to entry, and in turn what the suitable vehicle is for you.

UK Trade & Investment and the China-Britain Business Council can offer dedicated one-to-one consulting and incorporation services to assist UK companies establishing various kinds of permanent presence in China. Please contact one of their offices for more details – see the “Contacts” section of this guide.

 

Representative offices

Representative offices are often the first step taken by foreign companies when establishing a permanent presence in China. They provide a vehicle through which the foreign investor can undertake activities such as market research, customer liaison and support. Representative offices can also organise business visits from company headquarters, which can make the obtaining of business visas for visitors much easier. Public relations work and local administration are also permitted.

However, a representative office cannot conduct sales activities. This means they cannot sign contracts, receive income, or issue invoices and business tax receipts.

 

Joint Ventures

A joint venture (JV) is an organisation jointly owned by one or several Chinese and foreign partners. A JV can be formed by way of equity contribution, where ownership, risk and profit are shared based on each party’s monetary contribution. Alternatively, a JV can also be incorporated with liabilities and profit distribution being decided by contractual agreement.

Joint ventures may be beneficial in a number of ways. A good local partner may contribute market knowledge and strong marketing and distribution channels, and they may help reduce the costs and risk of market entry. In certain restricted sectors, such as automotive and insurance, forming a JV with a Chinese company is still the only permitted route for establishing a permanent presence in China.

Establishing a presence through the CBBC Launchpad scheme Under current regulations foreign companies are unable to employ Chinese staff legally unless the company is registered in China. CBBC’s Launchpad Scheme enables UK companies to establish a presence in China by having a local CBBC project manager based in one of CBBC’s offices, working exclusively on their behalf. The scheme is a fast and cost-effective way of enabling companies to try out the China market before committing to a permanent presence. More details of this service can be found on the CBBC website: www.cbbc.org

The challenge of establishing and running a successful joint venture is finding and nurturing the right partnership. Partners have to overcome issues such as mismatched expectations and differences in business culture and practices.

The ability to maintain effective communication, and control where necessary, is also crucial. It is essential that you carry out corporate and financial due diligence before you sign up to any partnership.

Companies should also plan an exit strategy. Like a marriage, it is better to have a pre-nuptial agreement than a messy divorce.

 

Establishing a presence through the CBBC Launchpad scheme

Under current regulations foreign companies are unable to employ Chinese staff legally unless the company is registered in China. CBBC’s Launchpad Scheme enables UK companies to establish a presence in China by having a local CBBC project manager based in one of CBBC’s offices, working exclusively on their behalf. The scheme is a fast and cost-effective way of enabling companies to try out the China market before committing to a permanent presence.

More details of this service can be found on the CBBC website: www.cbbc.org

The challenge of establishing and running a successful joint venture is finding and nurturing the right partnership. Partners have to overcome issues such as mismatched expectations and differences in business culture and practices.

The ability to maintain effective communication, and control where necessary, is also crucial. It is essential that you carry out corporate and financial due diligence before you sign up to any partnership.

Companies should also plan an exit strategy. Like a marriage, it is better to have a pre-nuptial agreement than a messy divorce.

 

Foreign Invested Partnerships (FIP)

On 1st March 2010, rules came into effect allowing foreign individuals or organisations to participate in partnership enterprises, offering a further alternative to representative offices, joint ventures, wholly foreign-owned enterprises or foreign-invested commercial enterprises.

FIPs allow for partnerships between two or more foreign parties (with all organisations or individuals being from outside China), or a combination of foreign and Chinese organisations or individuals. FIPs also allow for foreign partners to join an existing partnership set up wholly by Chinese partners (including the transfer of a partnership stake to a foreign entrant). Investment capital can be in foreign currency or in RMB. It is essential that the liabilities of all partners are carefully addressed before entering into the partnership.

FIPs do not need to be registered through the Ministry of Commerce, they only require registration through the Administration for Industry and Commerce. However, businesses in certain sectors will need to comply with other specific regulations when applying for registration. FIPs are bound by China’s industrial policies regarding foreign investment, and are only permitted if the Catalogue for the Guidance of Foreign Invested Industries allows 100 per cent foreign ownership. In some restricted sectors JVs are the mandatory vehicle for investment, and FIPs will not be allowed.

 

Wholly foreign-owned enterprises (WFOE)

A wholly foreign-owned enterprise (WFOE) is a company incorporated in China that is 100 per cent owned by a foreign organisation(s). Where permitted, WFOEs are now a popular option for foreign businesses, as it gives the investor complete control over their business entity as well as enjoying the full profit from its operation. Generally, WFOEs also give greater protection to the investor’s intellectual property rights, compared to a joint venture.

WFOEs are the appropriate structure for companies whose main activities in China are to manufacture and sell products, or provide services such as R&D or business consultancy. A WFOE allows the foreign investor to issue invoices and receive revenues in RMB (the Chinese currency) that can then be converted and repatriated out of China.

 

Foreign-invested commercial enterprises (FICE)

Since 2004, foreign-invested enterprises have been allowed to engage in business activities such as wholesale, retail, logistic services, agency services, franchising and direct importing and exporting. To achieve this, new and existing investors can apply to incorporate a business entity under a special category of foreign-owned enterprise, known as a “foreign invested commercial enterprise” (FICE).

 

Incorporating in China

In the UK, incorporating a company takes a few days, whereas establishing a permanent presence in China, whether a WFOE, a FICE or even a representative office, may take a few months and involves a complex process through which the foreign investor will obtain the various required approvals. It is likely that the foreign company will require professional support on various aspects of business incorporation, including tax planning, legal advice and project management. In some regions in China, foreign companies are required to use a government certified “Filing Agent” to handle the application process.

CBBC provides detailed guidance on various issues regarding business incorporation in China and offers a managed incorporation service. There are also many professional services firms in the private sector that can help with this process.

 
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Source - UKTI

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