Legal Industry News

Ten Steps To Starting A China Business.

Source: China Law Blog

Inc. Magazine just came out with an article today that does a nice job setting out the basics for foreigners starting a business in China. The article is by Issie Lapowsky and it is entitled, “10 Steps to Starting a Business in China.“ 

Its ten steps are as follows. I have tried to pull the best parts, but I have to admit to a bit of bias towards those portions that quote me the most.  So if you want the full story (and you should), I urge you to read it here.   

1. Do your homework.  Hard to argue with this. 

2. Pick a location.  Yes.   

3. Choose an entity:  

Before you register with the government, you need to decide what type of business entity to register. The most common for foreign businesses are joint ventures, representative offices, and wholly foreign owned enterprises. Each, of course, has its pros and cons.

A joint venture requires a partnership between a foreign business owner and a Chinese citizen. Though joint ventures may sound like the safest route, experts warn against them. Critics say the most common problem with joint ventures is no more than a classic case of “same bed, different dreams” syndrome.

“They fail nine out of 10 times. You’re working with someone who’s familiar with the territory on their turf, and they will end up with the business,” Harris [that's me!] says.

Representative offices are an easy, low-cost way to go, but it drastically limits the scope of what you’re allowed to do in China. As Yang says, “A representative office is just there to represent your offshore entity.” In other words, you cannot deliver any services or products, which means you also cannot generate revenue. A representative office affords you little more than the ability to show your face and build your brand name.

The most common type of entity, therefore, is a wholly foreign owned enterprise, known as a WFOE. According to Frisbie, “75 percent of American investment in China these days is 100 percent American-owned facilities,” because it gives business owners maximum quality control.

Not surprisingly, though, a WFOE is much more complicated to set up. It takes more time to get approval from the government, and it requires a minimal capital investment that you must put in a Chinese bank. Harris says. And, he notes: “That amount can vary greatly depending on the nature of your business and where you’re setting it up.”

4. Develop a business plan; 

A detailed five-year business plan is crucial, because once the government approves it, you will be able to operate only within its guidelines. If you start offering a product or service that is not in your business plan, the Chinese government can shut your business down. The same goes for where and how you operate.

“Make sure your business plan is as broad as possible to allow the company to operate freely,” says Collins. “U.S. companies expect to operate in a certain way here and they realize their business license may not allow them to do that.”

While it needs to be broad, it should also be specific. Make sure you include your location, projected revenues, product or service description, expected number of employees and budget requirements in the plan.

It’s also wise to tailor your plan to China’s five-year plan.

“If you’re making a high-tech piece of lawn equipment, and you just apply saying, ‘I’m going to be making lawn equipment,’ they’re not going to look at you very favorably,” says Harris. “But if you say I have this new, software-driven, high-tech piece of lawn equipment that’s going to put 20 software engineers in China to work right away, then it’s a different project.”

5. Find a liaison … or several:

A qualified liaison should be able to tell you where you need to go to register [your business], whether it’s the local, provincial or national government, and should do the talking once you get there. Harris says, “You need somebody who has negotiated that territory a number of times before and you absolutely have to have people who speak Chinese to go meet with the local officials.”

6. Organize the necessary documents:

“There are the written laws in China and then there’s the reality on the ground,” says Harris. Nowhere does this theory apply more than when it comes to what documents you’ll need to register.

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Always prepare for a wildcard, though. “We’ve had local authorities say they want to see exactly what it will be we’re manufacturing, so we bring it in,” Harris says. “We just did one, and they required we write a legal opinion explaining how LLCs worked in the United States. We’d never had that before, but when it happens, don’t fight with them, because you’ll lose, and you’ll waste time.”

7. Trademark your intellectual property:

Intellectual property violations are a big issue for foreign investors in China. Many U.S. manufacturers believe that because they have a trademark at home, it will hold up in China, but that’s not the case. In China, the first person to register a trademark owns the rights to it, regardless of whether or not that person is the first person to use the trademark.

“Somebody could go register what you thought was your trademark,” Harris says. “Then, when you’re about to ship $3 million worth of product, and your product’s held up at the port, you get a phone call from someone saying, ‘You’re using my trademark, and I’d like to sell it to you for $300,000 a year.’ If you don’t pay them for the trademark, your goods will never leave China.”

8. Find a bank: 

This part should be quick and easy, since there are plenty of banks with a huge presence in China. Try HSBC, which is based in Hong Kong, or Bank of America, which you can find all over the country.

“If you’re dealing with a bank that doesn’t have any relationship with banks in the United States, it makes it tough to keep track of your money,” says Wong. “You want to make sure you have a bank in the United States and a bank in China that has some sort of corresponding relationship, so your banking is more transparent.”

9. Hire a staff: 

Hiring in China is a delicate process, especially when it comes to hiring managers. Don’t assume that just because a person’s English is impeccable they’ll be able to run the business properly.

“If all things are equal,” Frisbie says, “the language skills can be greatly beneficial, but it’s far more important to have a smart business person in that role who’s going to run the company the way you want it run.”

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Once you have trusted managers in place, they should be able to assist you in hiring the rest of the staff. Remember, though, you need to have a contract for every employee you hire, as well as an employee manual. Without either, says Harris, “it may become nearly impossible for you to fire anyone.”

“In China, you need a reason to fire someone,” he explains. “That reason needs to be set down in your employee manual, otherwise your ex-employees can sue you for a lot of wages.”

10. Take it slow: 

Don’t jump into quick business deals just to turn a profit. It takes time to build business relationships over there. “It’s much different than the U.S. in regards to the amount of time that’s spent developing the business relationship before the actual deal is consummated,” says Wong.

What will win you success in the Chinese market is patience. “The Chinese have been doing business in a certain manner for thousands of years. Don’t even start to think for a millisecond that you’re going to change it.”

What’s the eleventh step?   

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