4 Q&A to successfully start a business in China
At the end of 2014, China was the first world economic power, beating the United States. Businesses and entrepreneurs from around the world have their eyes on the Chinese market’s complex and rapid development. Everyone wants to venture into the Middle Kingdom with dreams of success but very few Western companies commit the resources necessary for success in China. Here are 4 Q & A to help you succeed in your establishment in China.
At the end of 2014, China was the first world economic power, beating the United States. Businesses and entrepreneurs from around the world have their eyes on the Chinese market’s complex and rapid development. Everyone wants to venture into the Middle Kingdom with dreams of success but very few Western companies commit the resources necessary for success in China.
Here are 4 Q & A to help you succeed in your establishment in China.
1. Is China the right choice?
You absolutely must ask you this question. Although the attractiveness of China is strong, it is wise to conduct a study of the market for your industry to see if it is really promising in China. Unlike Western countries where consumer behavior is homogeneous, cultural and economic disparities are important through the Chinese territory. You cannot use your Western implementation strategy to establish yourself in China. Similarly, you can not apply the same systematic approach from a Chinese province to another. You may need to adapt your product to the habits, and tastes of Chinese consumers. Such as McDonald’s and KFC have adapted their menus to the food preferences of Chinese people by offering hot soy milk drink, or rice dishes. We must also not forget the Chinese compliance rules, the difference in morphology, etc.
2. Where should you settle your activity?
It comes to choosing the geographical area that is the most advantageous for you. First, you need a localized strategy on the scale of one or more Chinese provinces. Several criteria should be taken into account. For example, the quality of transport infrastructure (road, water), the quality and cost of goods storage areas, the existence of tax rebates, climate, etc. You should also not overlook the importance of government and local institutions. Some provinces ‘government are more favorable to the development of certain sectors. This can result in governmental logistical assistance and / or support on site. You can check with the Chinese Ministry of Commerce.
3. In what form?
Your choice will depend on the commercial or industrial nature of your presence in China and your ability to invest financial, human and technical capital.
If your business is commercial, you have a choice between:
- Franchise (exclusive right to use the mark in the territory, payment of royalties, possibility of invoicing, commercial autonomy, the franchisor decides the location, image, sales and communication strategy);
- The commissioned agent (often independent, proportional wage to sales, no subordination, vendor role only, communication, marketing and logistics costs at your expense, no physical location);
- Sales representative (the same as the commissioned agent unless he is an employee of your company often under an expatriate contract, the relationship of subordination exists);
- Representative office (goal: business development and communication, it does not allow billing).
There is also direct sales, by an intermediary or by group of exporters. They are forms of implantation but do not require local physical presence.
Then whatever is your industry, you can choose between:
- The subsidiary or WFOE (Wholly Foreign Owned Enterprise-): control of operations and physical presence, independent legal structure, choice of local business strategy, responsible for processing sales (invoicing, customs clearance, etc.), the local logistics and management of staff;
- JV (Joint Venture): joint venture should be considered with a local company with a complementary commercial and technical know-how to your company. It is based on a shareholders agreement, a technical assistance agreement, a license agreement and a trade agreement;
- The FIPE (Foreign Investment Enterprise Partnership, recent form investment in China (2010)): No minimum investment amount, no taxes on corporate income (each partner is responsible for the income tax on their share of the corporate income whereas the tax on corporate income for JV and WFOE is 25%), flexibility in the distribution of profits and a strong governance structure. This is ensured by a partnership agreement detailing the roles of each party and other key points and that must be provided for the registration of the FIPE with the Chinese authorities;
- Technology transfer: requires no physical presence.
None of this business vehicle is the best. The most important is to choose the first form that your investment will take. That is to say, the one that best suits your business and that you can support for the necessary period. Things can go slowly at first and then go very fast. You must plan long term. If you are considering a major investment, prior to investing, you should decide on a succession of forms for your company’s presence in China and prepare for each. The goal is to create an effective setup.
4. Which precautions to take before investing in China?
First, register your brand, protect your technology and your product’s value-added. Indeed, one of the areas of concern of the Chinese market for foreign investors is the protection of intellectual property.
The filing of patent and trademark in China is possible with the Chinese Trademark Office at the State Administration of Industry and Trade and with the Office of Intellectual Protection of State respectively. The main feature in China is that the brand to be registered must necessarily be translated into Chinese. Be careful, in this case, to hire a professional translator. The life of the trademark is ten years, renewable indefinitely. The registration fee of a brand depends on the type of products, the existence of a right of ownership and the agent fees. According to PACE (Agency for Business Creation), the brand Registration cost varies between 1600 and 2400 Euros.
Secondly, if you need to hire a Chinese employee, working with a Chinese partner or deal with a Chinese state institution, you must be aware of business practices and trading in China.
A failure in China would be missing a unique opportunity for development but can also, for example, affect your company’s relative position to competitors in the same market. You will never be prepared enough to deal with Chinese society. If you are unable to find answers by yourself to any of these questions, the best solution would be to bring in an expert in business development, PEO Services, intercultural management, legal matters and/or marketing.
With thorough preparation, perseverance and good environment, success is definitely possible in China!