Navigating China Guide (2012) - New Zealand Trade and Enterprise

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AGENTS “The best agents are developed over time and result from friendship.” – Dr Anatole Bogatski, former Student Services and Marketing Director, AIS St Helens For more detailed information on using agents and distributors see the “Selling in China – Using Agents and Distributors” section. Establishing an on the ground presence For companies wanting an ‘on the ground’ presence in China the most common options are to set up: • a representative office – which has limited powers and cannot conduct sales • a wholly foreign-owned enterprise (WFOE) – increasingly popular • a joint venture (JV) with a Chinese partner – fewer and fewer companies use this option. Setting up a representative office Setting up a representative office is the easiest way to establish an ‘on the ground’ presence in China. But Scott Brown, founder of RedFern Consulting, warns that representative offices have very limited uses and a company would need strong justification for setting one up. “They can employ people, thus they could be useful for a simple presence of checking up on manufacturers. “You certainly cannot manufacture with anything other than a manufacturing licensed wholly foreign owned enterprise or JV.” Representative offices are limited to research and liaison activities and cannot conduct any business transactions. They also cannot issue invoices or receive any revenues. Invoices must come from outside China. They can, however: • help with market development and market research • help build business relationships • cut out the need to hire some middlemen or consultants • manage manufacturing and help protect intellectual property • assist with after-sales service • assist with introducing new products • assist with dealing with government officials • help local administration work • help getting visas for visits • show commitment to the market which can open doors with customers, suppliers and officials. If everything goes according to schedule, and you have filled in all the forms correctly, office incorporation can take about three months. The Hong Kong Trade Development Council website has information on the process of setting up a representative office. PROS AND CONS OF REPRESENTATIVE OFFICES Advantages: • lower set up cost (no capital investment required) • shorter set up period • flexibility to exit • full control. Disadvantages: • restricted scope of business activities (e.g. no formal sales function or invoicing allowed, and value-added services cannot be performed) • more rigid labour regulations (e.g. you must use government employment agents) • not tax efficient. (Source: China Business Solutions website) KIWI LESSONS – EXPENSIVE AND TIME CONSUMING “The volume of paperwork is considerable, especially for a representative office only.” – Mark Templeton, former Chief Executive, Actronic Technologies “A rep office is expensive to run and must deliver value for money.” – Chris Hopkins, Managing Director, Scott Technology Setting up your own company A wholly foreign-owned enterprise (WFOE) is a private, limited liability company that is 100 percent-owned by a foreign entity. It is now the most popular option for foreign companies to establish a permanent presence in China. Many companies prefer to set up WFOEs (as opposed to joint jentures with Chinese partners) as this ensures the foreign party retains 100 percent control. WFOEs are able to issue invoices and receive payments in RMB and any profits can be remitted back to New Zealand as dividends after all taxes have been paid. It is also easier to protect intellectual property rights using a WFOE than a joint venture. WFOEs come in different types, depending on what business operations will be carried out: • Service/Consulting • Manufacturing • Trading (otherwise known as FICE – Foreign Invested Commercial Enterprises). The time required to set up a WFOE varies according to the type of entity chosen. The type of WFOE you want to use needs to be decided early during the application process because this will affect the scope of your business licence. A Chinese-incorporated company can only undertake business that falls within the scope set out in its business licence. Once a WFOE has been set up, it is very difficult to change its business scope. Plan ahead and ensure the WFOE has enough scope and flexibility to develop its operations as the business changes. It is possible to set up WFOEs in bonded or export processing zones which means that the entity would not be subject to import restrictions and import tariffs, particularly for goods being re-exported. The minimum capital required for a WFOE is RMB 30,000, but in reality the amounts requested by the approval authorities is 24
much higher than this. The authorities will approve a capital amount based on the type of WFOE, its location, the industry and business scope. They will only approve what they deem to be sufficient registered capital for your WFOE’s operations. Some types of business also have a minimum registered capital in order to qualify for VAT tax registration, without which you cannot invoice. Registered capital may be contributed in one lump sum within six months of the WFOE’s business licence being issued, or in instalments. If the registered capital is to be paid by instalments, then 20 percent of the total registered capital must be paid in within three months of the business license issue date. The balance must be paid within two years. Setting up a WFOE in China is subject to the examination and approval by various approval authorities. Once your company name and application to set up a WFOE is approved, you need to apply for a business licence. This generally takes 60 days. You then need to register the business with several government agencies, including tax, customs and foreign exchange administrations. Foreign companies in the previously off limit areas of China trading (import-export, retailing, wholesaling and distribution sectors), though classified as WFOEs, are referred to locally as foreign invested commercial enterprises (FICE). When getting help to establish a WFOE, be wary of using a local agent who intends to follow the standard steps without considering your particular requirements or needs. The worst case scenario is a company finding itself unable to perform some ‘assumed’ functions. The business scope or articles are very difficult to change later so you need to get it right from the start. Get help from someone who understands your particular needs and will not do a pro forma application. Adding certain clauses to the WFOE’s standard articles may help you deal with issues that could arise in future. These clauses might relate to scope of business, total investment, management control, intellectual property registrations and royalty streams, currency repatriation and liquidation conditions. If accepted by the authorities, the clauses can save time and effort. For a list of consultancies and professionals that could help Kiwi companies establish WFOEs, contact NZTE. PROS AND CONS OF WFOES Advantages: • full control over management and operation • more flexibility in company strategic issues • easier to repatriate profits (you can send them back once taxes are paid) • better protection of intellectual property rights • demonstrates commitment to the market. Disadvantages: • higher registration capital required • longer time to gain access to local knowledge, contacts and market. KIWI LESSON – IT CAN BE EASY “Our WFOE was relatively easy to set up and no more difficult than in Australia.” – Mike Lowe, General Manager, Hayes International Joint ventures A joint venture (JV) is a business jointly owned by a Chinese and a foreign partner. For a long time this was the only option available for foreign investment. JVs are still the only way you can set up a permanent presence in China. RedFern Consulting’s Scott Brown says you need to have very good strategic or regulatory reason to want to, or need to, go down the JV path. “They are notoriously difficult and if you can use a WFOE, do so.” Forming a JV can be a drawn out process and it can be hard for New Zealand companies to negotiate a favourable position. Reasons for JV failure include: • mismatches in expectations • concerns over conflicts of interest • violations of intellectual property rights • poor choice of JV partner. JVs are demanding on your time and resources. They need constant monitoring in critical areas such as finance, personnel and basic operations for them to succeed. If you do decide to go down the JV route, it is essential that you carry out thorough due diligence checks on your potential partner. Plan for your exit from a JV from the outset. It is rare that JVs are permanent and it’s better to have a ‘pre-nuptial agreement’ rather than a messy divorce. There are two types of JV arrangements: • equity JV where profits, risks and losses are shared in proportion to the parties’ respective contributions to the registered share capital • cooperative JV where each party is responsible for making its own contributions to the venture, paying its own taxes derived from the venture and bearing its own liability for risks and losses. Each party’s rights, liabilities and risks are clearly stipulated in the underlying contract. It’s important to use local or experienced lawyers to draft all JV documents and contingencies for exit, arbitration and other issues. Many industries restrict foreign ownership to 49 percent or less. In these cases you need to try to influence operational control through the agreed appointment of key senior management and board members. PROS AND CONS OF JVS Advantages: • immediate access to local knowledge, government relationship, and management talents • able to leverage established domestic brands, marketing and distribution channels. (Source: China Business Solutions website) 25
Page 1 and 2: NAVIGATING CHINA For New Zealand Bu
Page 3 and 4: This booklet provides practical adv
Page 5 and 6: is somewhere between half a million
Page 7 and 8: KIWI LESSONS - LOCAL EXECUTION IS V
Page 9 and 10: For China, and the rest of the worl
Page 11 and 12: Telecommunications China’s teleco
Page 14 and 15: 2. RESEARCHING THE MARKET 2.1 RESEA
Page 16 and 17: 2.2 MARKET VISITS Visiting the mark
Page 18 and 19: However, cold calling (for self int
Page 20 and 21: • Seek advice on the choice of ch
Page 22: If the Chinese side is hosting a di
Page 25: Testing the waters New Zealand comp
Page 29 and 30: Other options • Coat-tailing - ta
Page 31 and 32: closely with them at all levels, on
Page 33 and 34: KEY LEARNINGS • thoroughly resear
Page 35 and 36: It is also important to put IP issu
Page 37 and 38: Administrative enforcement The main
Page 39 and 40: 3.5 BUILDING RELATIONSHIPS Building
Page 41 and 42: WAIKATO UNIVERSITY CASE STUDY My cu
Page 43 and 44: Meetings Understanding meeting prot
Page 45 and 46: Deep guanxi is a strong feeling of
Page 47 and 48: Entertaining Evening banquets are n
Page 49 and 50: On it’s website, NZTE has a list
Page 51 and 52: • ask for details on the company
Page 53 and 54: KIWI LESSON - BEWARE OF OVERPROMISI
Page 55 and 56: Before signing a contract with a di
Page 57 and 58: KIWI LESSON - LOGISTICS ARE STILL A
Page 59 and 60: You should also build into your pri
Page 61 and 62: Trade media CATEGORY Food and Bever
Page 63 and 64: “Recommendations are a company’
Page 65 and 66: Chinese television personality and
Page 67 and 68: • registration information and qu
Page 69 and 70: agreement was missing (should be A8
Page 71 and 72: How to make contact with ‘half-pa
Page 73 and 74: Accounting records must be kept in
Page 75 and 76: If you have a long-standing relatio
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These foreign exchange controls are
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translations in all cases - it’s
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Using e-logistics China faces a num
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6.6 LANGUAGE AND USING INTERPRETERS
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Things to avoid: • leaving senten
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7. MANUFACTURING IN CHINA 7.1 PROS
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BUSINESS MODELS Least Cost and oper
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Finding and building a relationship
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ATRAX CASE STUDY Sourcing from Chin
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Protecting intellectual property In
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The contents of this brochure are t
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