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In the last 20 years, the Chinese market has grown up magnificently. More and more foreign companies have been expanding their businesses into China, either through direct investment or through increasing numbers of cross-border transactions.
However, doing business in China is not that easy. There are several factors due to which doing business in China is full of challenges. The challenges of doing business in China are:
- Language barrier
- Various business-related regulations
- Unique tax requirements
Anyone who is willing to open a new company in China can open different kinds of companies according to the service needs and the related rules and regulations.
Due to the complexity of the China policies, fully understand the different legal entities in China is essential to avoid future risks.
Below we share guidance of different types of companies that can be formed by a new investor plus challenges that every investor should be aware of.
Wholly Foreign-Owned Enterprise (WFOE)
Generally, if a foreign company wants to open a company in China then they can open a Wholly Foreign-Owned Enterprise (WFOE).
Even if this kind of company takes a lot of time and detailed documentation to set up, a WFOE can make import and export business. It can easily conduct sales, issue invoices, and receive revenue.
By opening a WFOE, the investor can have 100 percent control. WFOEs have complete jurisdiction over their internal decisions, operations, human resources, and corporate culture. WFOEs can also directly hire employees from their own.
There are two forms of joint ventures open to international traders in China:
- Equity Joint Ventures
- Cooperative Joint Ventures
An Equity Joint Venture can be open by a foreign investor with a Chinese partner.
It typically takes about six to 12 months to negotiate. The profits, risks, and losses are shared in proportion to each partner’s equity stakes. Ownership is determined by capital contributions, but foreign investors must invest at least 25 percent into the venture for it to be treated as a foreign-invested enterprise.
Cooperative Joint Ventures have more flexibility with regard to profit sharing.
If the investor is willing to merge with a Chinese company, both entities are then able to use the Chinese party’s business license to apply for a contractual arrangement. There is no need to set up a new legal entity.
However, under Chinese regulations, any joint venture partner has the right to sell its ownership interest to a third party, without the partner’s consent. The only recourse is to then purchase that ownership interest.
A Representative Office (RO or Rep Office) does not come under the legal entity. There are many limitations to set up a Representative Office in China. Although it is easier and less expensive than the WFOE to establish a business presence in China.
However, this process is subject to tight restrictions for international traders.
The foreign company can form the RO just with the purpose of Market Research. The RO cannot make any kind of profits, as well as this kind of enterprise, cannot hire an employee on their own.
In case the RO wants to hire some employees to work for their company, they might need some other company like HROne to hire their employees and look after their payroll and social securities. The RO can only promote its parent company and foreign headquarters.
The 10 Challenges of Doing Business in China
1) Capital Investment
Registering a new business in China requires a minimum capital investment.
Registered capital is an initial investment that is planned to be immediately used in the operation of the company.
It is not a deposit that is saved in a bank and never touched. It can be used to pay salaries and rent, to purchase product, or for any other normal start-up operating expense.
2) Market Access / Analyzing the Customer
To develop the growth in China market is it very important to have good market access and contacts.
It is estimated that 37% of products that pass for the US market fail in the China market. That’s why the investor must have a very good local distribution network and must understand the buying habits of consumers to be successful in a market like China.
3) Business Location
For some specific business, it is very important to choose the right service location.
For example, if there is an investor who is willing to start their new trading business in China then they should know that there are some regions/cities in China which come under Free Trade Zones.
Free trade zones in China are a specific class of special economic zones; an area where goods may be landed, handled, manufactured, and re-exported without intervention of the customs authority.
4) Business Culture
Before starting any business, it is very important to understand the business culture of the country/area.
To set up the business in any country, business people should understand the culture and sentiments of the people of that country. The same applies to China as well.
In China, leaders and managers expect obedience without raising any questions. Business people must have respect for the reputation and feelings of people within the workplace, family, friends, and society.
5) Finding Good Employees
To grow the business in the market, investors should hire a good employee who will be passionate about delivering their services.
Finding good employees is a minor task compared to the business challenge of building your hired employees into a team.
Employees are the direct representatives of the business to the customers and the outside world. They are the reflection of business culture and ethics. If an employee of any company is bad or rude to the customers, it is going to portray a bad image of the company.
In the past few years, we have observed that the foreign companies are more likely to start the business in China’s Tier 1 cities like Shanghai, Beijing which are highly populated.
These tier 1 cities provide the best testing platform even with less experience. But these companies also have to face huge competition due to more number of available companies and huge operational costs.
7) Finding Good Customers
The seventh challenge any investor will face in the process of starting a small business from scratch is finding good customers.
A good customer will try to do the right thing that will benefit both himself and your company mutually.
Bad customers will always look for loopholes in the company’s policy to exploit and make a few gains. These customers will always try to exploit the company’s goodwill and look for ways to rip off the company.
8) Government Challenges
The government of China imposed the rules stating what and how products are designed, developed, sold, and used in China, and also the products must be compliant before coming to the market.
This can be an issue for many foreign companies that used to follow the rules of their countries and can also impact the appeal of the country.
9) Opening a Chinese Bank Account
This part should be quick and easy since there are plenty of banks with a huge presence in China.
Investors should make sure that they have a bank in their country and a bank in China that has some sort of corresponding relationship, so your banking can be more transparent.
10) Human Resource Management
Along with the development of the Chinese economy, Human Resource Management (HRM) has become an increasingly important topic in China.
For newly established foreign companies in China, there are specific rules that the new company should follow.
To avoid the potential compliance issue, a foreign company shall have a deep knowledge of all the Chinese policies and practices since the policies are changing from city to city and year to year.
A foreign company can either hire an experienced HR staff to manage employee’s payroll, benefits, and daily HR issues, or it can choose a professional HR agency in China and outsource employee’s payroll and benefits to the vendor.
China’s market is always a boom for most industries.
The main reason behind this is the population of China. More are the people more will be the customers. Chinese customers love to try new technology and fashion. If foreign investors genuinely want to start a business in China, then in 95% cases they will have a good chance to earn a profit.
We hope that with this article you have become more aware of the challenges when doing business in China.
How can we help your business in China?
We are a non-state consulting firm based in Shanghai that helps foreign businesses enter the Chinese market and develop their operations. Our clients are assisted from initial stages with company formation and employment solutions, to further support-requiring stages with our business solutions such as tax & accounting and payroll & tax.
If you are interested to know more about how to expand your business in China, request a free consultation today!