Guest Editorial: Helpful Tips for Doing Business in China
By Jack Antounian, Corporate Director, Global Technical Operations, MKS Instruments
Jack Antounian provides a first-hand view of successfully doing business in China. He recently spoke at the MeetChinaBiz meeting in Worcester, a forum for manufacturing companies to collaborate on issues related to doing business in China. Join us for our next meeting on Wednesday, November 16, 2005. Details Available on-line – Jack Healy, Director, MassMEP
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Considering doing business in China? I hope you will find these tips helpful in your business strategy planning and dealings with companies in China.
In the past few years, more and more small to medium size companies from around the globe have been rushing to do business with China, taking advantage of the low labor costs, large labor pool, and tax incentives in the special economic zones, giving them competitive advantage over competitors and increasing their profit margins.
Since it opened its door 27 years ago and entered the WTO in 2002, China has become one of the largest economies in the world. China is a country with a population of more then 1.29 billion, accounting for one-fifth of the world’s population. It is made up of 23 provinces, 5 autonomous regions, 4 municipalities directly governed by the central government, and the special administrative regions of Hong Kong and Macao.
Since 1978, China’s GDP has been growing at an average rate of 9% per year and in 2004 China’s GDP was greater then US$1.4 trillion, In year 2003, the volume of China’s imports and exports was US$840 billion, ranking fourth in the world. From January to November 2003, about US$49.3 billion in foreign investments flowed into China, which made it the largest recipient of FDI in the world, exceeding the US for a second consecutive year. China is still in the early stages of a developing market economy and its social, legal, and financial systems have yet to keep pace with the rapid development of its economy.
There are 15 Free Trade Zones and 38 Export Processing Zones, mostly concentrated between the northeastern to southeastern part of the country. They are relatively small, enclosed, and policed areas and are considered outside of customs territory. Each zone offers different investment and trade conditions, and various incentives.
Types of Investments
Investment structures include Representative Office (RO), Equity Joint Venture (EJV) or Cooperative Joint Venture (CJV), Wholly Owned Foreign Enterprise (WOFE), Company Limited by Shares (CLS), and Foreign Investment Holding Company (FIHC). Foreign investors need to check the guidelines prior to obtaining government approvals and register. Generally, there are three categories of businesses: Encouraged, Restricted, and Prohibited. Industries that fall into the restricted category require domestic control or joint venture structures.
As a general rule, a Foreign Investment Enterprise (FIE) has to be approved by the Ministry of Commerce; some industries may also require the approval of a specific ministry of the state council.
An RO provides liaison services and coordination of functions for US offices and is not supposed to engage in business activities. It is to conduct market research, customer liaison, and product promotions for the parent company.
EJV or CJV with a Chinese company may be a viable entry option and provide a medium term commitment to take advantage of existing resources in China. EJV must incorporate as a limited liability company (LLC). Investment is evaluated and assigned as monetary value, distribution of profits is in proportion to each shareholder’s capital contribution to the JV, and a board is required. CJV can be an LLC or non-legal person enterprise, and may contribute its investment by providing “cooperative conditions” which need not to be evaluated. Cooperative parties are free to decide the ratio of distribution of profits among the parties, which may not necessarily be related to the proportion of capital contribution. A CJV can either have a board or a “joint management committee” to decide the major issues of the JV.
WOFE ensures full control over investments and operations and assumes maximum risks and rewards.
Depending on the scale of investment and financing plan of an FIE, a foreign investor may consider establishing a CLS as its investment vehicle. Under the PRC law, setting up a CLS must satisfy certain strict conditions, such as the registration of capital shall be more than RMB 10 million and there shall be at least 5 shareholders. Promoters’ shares in a foreign invested CLS may not be transferred within 3 years of the date of incorporation of the CLS.
To consolidate its operations and for easy coordination of investment in China, a foreign investor may consider establishing an FIHC, which refers to an EJV or WOFE established mainly for investment in other enterprises in China. The major difference between an FIE and FIHC is that an FIHC mainly carries out the business of investment instead of production and such investment is not subject to the satisfaction of certain conditions applicable to ordinary FIE.
Choosing the Investment Vehicle
Issues to consider when choosing an investment vehicle in China include the qualification of Chinese counterparts, granted and allocated rights for use of lands or collective ownership of lands, state owned assets and equity valuation and approval, preferential treatment, employment, environmental protection, intellectual property protection, foreign exchange control and profit repatriation, and re-investment and external investment options by FIEs.
Capital Requirements
When starting a business in China expect a moderate US$150K to US$1M investment, depending on your industry. Minimum capital requirements by law include:
Technology development, consulting and services, RMB 100,000 about US $12,000,
Production operation, RMB 500,000 about US $61,000,
Wholesale, RMB 500,000 about US $61,000, and
Retail sales, RMB 300,000 ~ $37,000 US.
Each form of investment has different operating characteristics, advantages and disadvantages, and different government regulations and tax rules.
Business Culture
Business culture in China is very personal. People, relationships, respect, and trust are extremely important. It’s critical that you establish a trusting, personal relationship that demonstrates your respect. The relationship you develop with a person represents your relationship with his or her entire company. The ethical system in China involves respect for superiors, duty to family, loyalty to friends, sincerity, and courtesy. Age brings increased respect and status.
It is very important to "maintain face" in everything the Chinese do, therefore, never insult or openly criticize a person in front of others. Accepting and participating in Chinese customs, hospitality, and mutual respect and openness for their ideas, inputs, and leadership is helpful and appreciated. Handshaking is the accepted greeting, with a light handshake encouraged. Also, the Chinese lower their eyes slightly as a sign of respect; staring may make them uncomfortable. Gifts are important. Be aware of all favors done for you and prepare to respond in kind. Last, but not least, direct or indirect friendships with local officials are helpful, especially with influential officials.
The Workforce
The average age of factory employees is 17-25. Most factory workers are female, with men doing the heavy and dirty work. Most managers are male. Senior managers tend to be older: 40s, 50s, or 60s. Factory wages are about $0.99 per hour, fully loaded. Manager wages are less then $10,000 per year, fully loaded. Overtime for greater then 45 hours is 1.5x, with 2x on Sundays and 3x on holidays, depending on the contract negotiated with local government. Benefits are negotiated with local government, including housing, cafeteria, medical, uniforms, and recreation. Workers live on premises or in apartments close to the factories, especially in Southern China. Salary breakdown includes base salary, basic benefits like New Year’s bonus, savings fund, attendance bonus, social security, and wage tax. Other additional benefits include, cafeteria, housing, uniforms, utilities, medical, and industrial insurance.
Things to consider: cost and reliability of utilities, transportation, taxes, fees, RMB revaluation, legal system, customs, and IP protection. Major tax categories for FIEs and foreigners include; value-add, consumption, customs duty, business, FIE income, individual income, land appreciation, urban real estate, stamp duty, and vehicle and vessel usage taxes. The standard enterprise income tax rate in China is 33%, but you can expect to pay about 15% if you are located in a special economic zone.
Challenges
Expect to face challenges when doing business in China, including time zone, communication, logistics and shipping lead times, import/export quotas, supplier capability and performance, understanding customer quality requirements, select material availability, reliable utilities, travel time and costs from the US, and uncertainty on IP control issues, just to name a few.
Things to consider: evaluate product technology, labor content, and volumes; IP and commercialization; business management; site geographic location; inventory considerations; quality and reliability requirements; and planning.
These are exciting times for doing business in China. Growth opportunities, enthusiasm, and continuous changes in the country are very visible. There are challenges, to be sure, but they are manageable. It’s certainly worthwhile for you to consider doing business with China, to relocate, or at least to explore trade and procurement opportunities. With the right business plan and right guidance, you can achieve your goals in China.
This document contains information from various sources. This information is subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied in this document. The author assumes no responsibility or obligation to update the information in this document.
