CHINA BASICS FOR BUSINESS
[Handbook of 6 Topics]
Acesso RAS em 23jun2016.
http://business-center.amchamchina.org/china-basics/
Welcome to the China Basics
Welcome to the China Basics. Here we trust you will
find all the information you need to begin either assessing the opportunities
in China and how to take the next step, or to expand your business if you are
already operating in China.
Take a look through the
various sections of the handbook which provide a valuable source of information
as well as numerous links to further reading:
1.1.
Many American businesses are either looking to begin the process of
setting up a business in China or to expand their operations into China. The China Basics Handbook explains the road to operating in China and
the challenges that may entail. Operating in China can have its rewards but it
is also a difficult and diverse market and companies should understand the risk
and effort involved. The time and resources it takes to successfully enter the
Chinese market may prove to be the biggest challenge. Companies who engage in a
thorough analysis of how operations in China can influence their business will
be the most successful.
1.2.
China is consistently growing. The
emergence of a middle class and a rapidly urbanizing population is driving
massive demand for US exports in particular. Energy, chemical, transportation,
construction, machinery, and healthcare imports from the US have been
increasing over the past decade. China’s GDP has grown at a steady annual rate
(despite reports of “falling” to an expected 7.5% this year), current foreign
reserves are sitting at almost USD 4 trillion, and the central government’s 12th five
year plan is aiming to bolster consumer spending from 35% of GDP to 50% by
2015. Since 2010, China has become the second largest economy in the world and
GDP per capita has more than doubled. With this growth, China has consumed a
large amount of raw materials, although this consumption has cooled in the
first half of this year. Prior to 2014, the country accounted for 20% of
non-renewable energy resources over a 4 year period, 23% of major agricultural
crops, and 40% of base metals consumed globally.
1.3.
With a population of 1.3 billion, China is one of the largest consumer
markets in the world. Driven by rising incomes, it is expected
that China will account for 20% of global luxury goods consumption by 2015.
From a marketing standpoint, China is the ideal untapped consumer base for
American companies. Attempts to capture the entire Chinese market would be
unrealistic but the provinces of China have unique economic and social
characteristics that create diverse segmentations in consumer habits. These
sub-markets are large and can provide an excellent source of revenue without
the need for a dominant market share. The key to successful market penetration
is regionally targeted efforts.
1.4.
China’s massive population also provides the opportunity of a vast labor
supply although labor costs are rising. While
China remains the manufacturing hub of the world, there have been multiple
factors contributing to the increasing cost of labor in China. This includes
shortages of skilled labor in certain regions and an increasing concern of the
environmental impact of industry. The result has been a gradually decreasing
low-cost advantage. To remain competitive in the low-cost labor market, Chinese
factories have become more efficient and are able to deliver higher-quality
products in a shorter timeframe and China continues to be the go-to market for
production outsourcing.
1.5.
China remains the world’s largest holder of foreign currency reserves,
totaling almost USD 4 trillion. With this capital
the state has encouraged Chinese businesses to explore offshore investments to
ensure security in sectors with rapidly growing demand like energy, food, and
healthcare. In fact, outbound investment in China has more than quadrupled in
the past five years, from $18.5b in 2008 to $85b in 2013. While 90% of outbound
investment from China remains state driven, reforms in recent years have
fostered the emergence of a growing private sector presence.
It is important to consider the nature of
the investment before attempting to enter the Chinese market. The presence of an American business operating in China can take a
number of forms and these forms typically indicate the scale at which these
businesses intend to operate overseas. Foreign investors who have a
comprehensive understanding of the Chinese market and intend to establish an
immediate presence may initiate their entry into the market with a large
capital investment. Others may choose to take a more cautious approach by
forming network connections with local businesses, conducting regionally
targeted market research, hiring a local agent, or contacting firms that
specializes in assisting foreign businesses to establish a presence in China.
[2.1] AGENT
American companies that are hesitant to jump into the Chinese market
have a number of tools to assist them in gauging the Chinese business climate.
One way of understanding the Chinese markets is to hire a local agent. An agent
who lives in the desired market can help foreign businesses to understand the
subtleties of consumer behavior and develop a working relationship with
suppliers. An agent should be closely monitored by the company’s headquarters,
fully understand the overall company strategy in China, and be held to the same
accountability as any other company employee.
[2.2] REPRESENTATIVE OFFICE
Since a representative office is not considered a foreign invested
enterprise, there are no minimum investment requirements. Capabilities of a
rep. office include converting Renminbi into US dollars, importing items
necessary for running the business, and obtaining long-term visas for foreign
employees. However, a rep. office operates under a number of restrictive
factors that range from limiting the autonomy of employment, to increased
taxation on business expenses, to the inability to invoice or issue official
receipts (fa piao). Nevertheless, a representative office can be one of the
easiest methods for American companies with no previous experience operating in
China to establish a legal presence in the country.
[2.3] WFOE = WHOLLY FOREIGN OWNED
ENTERPRISE
For businesses that are more confident in their understanding and
experience in operating within China, there are a range of options that can
facilitate immediate operation within the market. The most popular form of
foreign invested enterprise is a Wholly Foreign Owned Enterprise (WFOE). Unlike
a rep. office, WFOEs may conduct business transactions in the country and have
full autonomy over employment. One prior drawback to establishing a WFOE
involved the requirement that a minimum of registered capital be invested although
this may no longer be the case. Recent statements in regard to reforms by
the central government indicate that registered capital requirements will no
longer be decided by the local or national Administration for Industry and
Commerce but are to be left to the discretion of the company representatives
and Board of Directors. Regardless of whether these reforms to registered
capital requirements are in fact implemented, WFOEs have become the prevalent
form of foreign investment due to the relative simplicity of the establishment
and the fact that they can be 100% foreign owned. WFOEs are not available for
all business sectors in China as the National Development and Reform Commission
(NDRC) and the Ministry of Commerce (MOFCOM) publish a list of encouraged,
restricted, and prohibited industries (see China’s Ministry of Commerce
website.
and industries that are not encouraged often require a joint venture
partner.
[2.4] SETTING UP IN A PILOT FTZ = FREE
TRADE ZONE
The following is an update on setting up a business entity in the Free
Trade Zone in Shanghai: twelve administrative approvals for foreign companies
are no longer required in China’s FTZs. Where approvals are required, officials
claim that if proper documentation is provided for a company in an appropriate
industry, business licenses should be granted within about four days.
Administrative approval for foreign companies that want to merge, close, or
alter their operating period will be removed (although this does not take away
steps required to go about merging, closing, or altering a company). Joint
ventures can be established without approval as well, in addition to extending
their cooperation periods and making changes to contractual agreements between
the partners in such ventures. Theoretically, all of these simplifications went
into effect on March 1, 2015 but it is expected that there will continue to be
some bureaucratic holdover from previous requirements. The granting of a
business license in less than a week assumes that all paperwork is properly
prepared, notarized when necessary, and submitted in a timely manner.
[2.5] EJV = EQUITY JOINT VENTURE
Another from that an America business may take in China is an equity
joint venture (EJV). This requires a capital investment from both a foreign and
domestic firm. The proportion of the investment by both parties directly
represents the amount of profit and risk that the companies assume in the
partnership. Foreign companies that wish to enter an industry that is
restricted to WOFEs will often use a joint venture. Joint ventures should only
be entered into with a clear understanding from both parties in regards to
objectives and exit strategies.
[2.6] CJV = COOPERATIVE JOINT VENTURE
The second type of joint venture is the cooperative joint venture (CJV).
Similar to an EJV, Corporate joint ventures entail a partnership with a
domestic Chinese firm but the assumption of profit and risk is not tied to the
proportion of investment by either firm. Instead, the partnering firms make an
agreement beforehand entailing the assumed risk/profit by each.
[2.7] M&A = MERGERS AND ACQUISITIONS
Finally, Mergers and Acquisitions have remained a popular technique to
invest in China. This method presents foreign investors with a number of
options in capital investment, including asset and equity acquisitions.
[3.1] Reforms to Setting-Up a Legal
Presence in China
As stated previously, significant steps have been taken lately at both
the central and provincial level to streamline the process for setting up a
legal entity in China. The Shanghai Pilot Free Trade Zone (Shanghai FTZ) in
particular has promised a “Delaware” type registration process for foreign
entities with registered capital requirement to be set by the companies
themselves as opposed to the State Administration for Industry and Commerce
(SAIC) and for certain approval processes to be done on-line. It is still too
early to tell exactly how or when or to what level these reforms will be
implemented but this handbook will be updated monthly, if not weekly, in order
to keep abreast of the implementation. In the meantime, the below information
holds true for most parts of China that are outside the Shanghai FTZ.
[3.2] Representative Office and WFOE
There are a number of steps that must be taken in preparation for
establishing either a representative office or a WFOE in the Chinese market.
Step 1: Find a local sponsor
This is a requirement for a rep. office: a local Chinese sponsor is
required to act on behalf of the foreign company and will approach the Ministry
of Commerce (MOFCOM) on its behalf to submit the necessary documents for the
establishment of a rep. office. A local sponsor can be arranged through a
Chinese company with which the foreign company has had dealings in the past.
Sponsors can also be found through several state-approved Foreign Service
companies.
Step 2: Rent Office Space
It is difficult to begin to fathom the requirement that a foreign
company is required to rent office space prior to obtaining a business license
but this is indeed the case. A legal business address is required for the
application of a rep. office or a WFOE as well as a signed lease of at least
one year in duration by the legal representative. Shelf companies and virtual
offices, unless holding the proper licenses and approvals, are illegal in China
and despite their existence should be avoided. It is essential prior to signing
the lease to ensure that the landlord is licensed to rent to foreign
businesses; they should be able to provide you with a valid license to that
affect (zu lin xu ke (租赁许可).
Step 3: Apply to MOFCOM for approval certificate
An application for either a rep. office or a WFOE should be sent to a
local Ministry of Finance branch. Upon receiving the application MOFCOM will
issue an approval certificate within 30 days. The application will require the
following documents to be completed and translated into Chinese.
i. An application letter signed by the chairman of the board or the general
manager. The letter should also include a description of the company's business
background and its major trading partners in China
ii. Certified articles of
incorporation
iii. Notarized copy of the foreign company's business license
iv. A list of the board of directors, management personnel or principal
partners
v. An original bank reference letter testifying to the company's
creditworthiness and any additional documents concerning the company's
financial standing
vi. A board resolution letter containing the purpose for setting up the rep.
office or the WFOE and the intended scope of its activities in China
vii. A notarized letter from the CEO nominating the chief representative and
the chief representative's detailed resume
viii.
Additional documents that may be required
by MOFCOM
Step 4: Apply to SAIC for business license
Upon receiving the approval certificate, a foreign company has 30 days
to apply for a business license with the local branch of the State
Administration of Industry and Commerce. The application should include all of
the documents submitted to MOFCOM with the addition of the approval
certificate. The SAIC normally takes 30 to 60 days to approve and issue a
business license. Once the license has been issued, the rep. office or WFOE
will be legally established.
Step 5: Additional business registration formalities
A number of business registration formalities need to be attended to
after the rep. office or WFOE has been established. These include:
i.
Obtaining an organization code from the
General Administration of Quality Supervision or its local branch
ii.
Registering with the local and state tax
bureaus
iii.
Registering with the local customs bureau
if your company needs to import any business supplies or office equipment
iv.
Registering with the State Administration
of Foreign Exchange (SAFE) to allow the operation of foreign currency bank
accounts
v.
Open a bank
account
[3.3] If this appears to be a complicated process, it is. The idea that a “Delaware” style approach to business registrations
will take place overnight is unrealistic although we understand that
improvements are being made on a weekly basis. For example, some municipalities
claim that the initial paperwork required for the local SAIC can be completed
on-line. In any event, we will update this site as information becomes
available on exactly what steps have been taken to streamline the currently
cumbersome registration process.
4.1. There are a number of ways that American businesses can sell products
and services in the Chinese markets. The gradual liberalization of the Chinese
distribution system has provided full trading and distributions rights for
overseas companies and removed restrictions on size requirements for trading
and distribution companies.
4.2. These changes have opened the doors for small business to operate
competitively in the Chinese market. However, the licensing and approval
process remains convoluted and opaque. It is recommended that smaller
businesses take advantage of alternate distribution channels that are available
to assist them in their entry into the Chinese market.
4.3. There are three major sales channels available to American companies for
their initial entry into the market: local distributers, trading companies, and
local agents.
4.4. American businesses that want to establish an immediate market presence
without large capital investments in forging their own sales channels should
look to local distribution firms. Local distributors provide existing sales
networks which enable more efficient promotion and distribution of products.
4.5. They are also better suited to track and maintain compliance to
regulatory changes in both local and regional markets. Distributors should be
held to the same standards as those in the U.S. not only in terms of
performance but also in compliance.
4.6. While it is no longer necessary for foreign SMEs to use local trading
companies for import/export in China, trading companies provide many of the
same ease-of-use benefits as local distributors. Trading companies specialize
in navigating the complex process of customs clearance and import/export
formalities that come along with selling or constructing American products in
China.
4.7. Many trading companies have offices around the world and are sanctioned
in dealing with a wide array of products. Large trading companies may also have
established distribution networks in China that can provide a market presence
similar to that of a local distribution firm.
4.8. With more and more foreign companies looking to establish a presence in
China, local agents are keen to help purchase and distribute products to
Chinese businesses. These local agents are not authorized in import/export;
rather they operate as a middle-man between importers and sales agents
throughout China.
4.9. They can also act as a foreign sales agent for Chinese distributers,
purchasing foreign products overseas and importing them for a commission. These
agents are typically smaller entities and will not possess the wide reaching
distribution capabilities provided by trade companies or local distributers, so
it is not unusual for companies to deal with multiple sales agents to
adequately disperse goods to numerous provinces in China.
5.1. China is home to the second largest
consumer market for consumer goods. For the
past two years the Chinese consumer good market has grown at a rate near 20%
and should continue to show signs of growth. The emergence of a massive middle
class and rising personal incomes are driving this purchasing power.
5.2. Successful marketing in China requires a
strong understanding of the market and business climate which is why it is
strongly recommended to hire a local marketing expert. China is a massive country, and like the American market, different
regions and provinces require different approaches. A local representative will
provide an unparalleled understanding of language, institutional, and cultural
barriers in promoting American products in Chinese markets.
5.3. Marketing products in China is just as
important as establishing distribution channels, and just as complex. There are numerous factors to consider when marketing to a Chinese
audience including pricing, localization, customer support, trade promotion and
media exposure. Certain changes should be made to products to account for
regional tastes and customs when localizing a product. Whereas brand
recognition is one of the most important factors to account for in the American
market, it is much less a selling point for basic goods in China.
5.4. Pricing is overwhelmingly the most
sensitive aspect to the majority of consumers in China. But with the emergence of a middle class where social status is seen as
an investment, Chinese consumers are willing to pay a premium for luxury items
that will be seen by others. Furthermore, products that are accompanied by a
strong after-sales service are valued and distinguished by Chinese consumers.
5.5. In regards to sales and customer support
quality, American brand power can be an influencing factor. As Chinese consumers become more aware of food and product safety,
American products are becoming more desirable because of stricter regulations.
5.6. Advertising through media in China is
somewhat similar to the American markets.
Traditional media markets like television, radio, newspaper, and trade shows
are all viable means of advertisement.
5.7. Advertisement in television remains the
most dominant form of advertising in China. It is
also the largest in terms of expenditure. In the past decade advertising
expenditure in television has grown at a consistent rate of 13%, largely
because of the broad reach and constantly growing audience that it provides. It
is estimated that China accounts for over 700 million television viewers,
making it the second largest marketing platform next to the internet. China
Central Television (CCTV), China’s national television network, holds a
primetime advertising auction every year. Sales from the event in 2012 reached
a total of $2.6 billion, a 12% increase over the previous year.
5.8. Radio remains the leader in growth for
traditional media outlets, seeing an annual growth rate of 21% in the past five
years. This rapid growth can be attributed to sales of cars as more Chinese
households purchase their first vehicle. Regardless, radio continues to be a
key source of mass advertising. There are three major companies responsible for
broadcast radio advertising: China Mobile, China Telecom, and China Unicom.
5.9. The adoption of internet enabled
smartphones in China has fostered the booming ecommerce market. Like amazon and ebay in America, Chinese retail websites are beginning
to take a dominant role in sales. Online retail shopping is the fastest growing
form of commerce in China. Valued at USD 64 billion and accounting for 40% of
all business to consumer transactions, the dramatic growth seen in the
ecommerce market is driven by the 618 million internet users in the country.
Consumer and industry targeted shopping websites Taobao and Alibaba provide
detailed listings from 3.7 million sellers of items ranging from home
appliances to industrial fertilizer.
6.1. China has received a negative reputation
in the past for its handling of, or lack of handling, intellectual property
theft. It may come as a surprise that China has a very thorough set of laws
protecting IPs. The issue lies in their enforcement. Nevertheless, there are a
number of steps that American business can and should take to protect
themselves from the risks of operating in China. Many of China’s IP protection
systems rely on a “first to file” structure for registration. This means that
no protections are provided for unregistered IPs and that a first come first
served mentality exists when registering. In fact, it is not unheard of for
others to register an IP trademark or copyright solely for the purpose of preventing
the creator from using it. It is recommended that if a company has any plans to
operate within China in the near future that they should apply for the
appropriate form of IP protection well in advance.
6.2. In regards to trademarks, it takes a
minimum of 15 months for an application to be processed. Companies should consider not only trademarking their distinctive
phrases or logos but a Chinese language version as well.
6.3. While patents fall under the
“first-to-files” system, China is a signing party to the Paris Convention, meaning that patents filed in any country that is signatory to the
convention can be retroactively registered in China for up to 12 months.
6.4. Copyright falls under the “poorly
enforced” category in China and while work created in another country automatically gains
copyright protection in China it is highly recommended that companies register
the copyright in China. Doing so will provide a stronger foundation on which to
defend the claim and expedite the process of enforcement.
6.5. Protecting intellectual property can
extend further than solely registering the IP. It is important for a business
to protect itself and its property contractually. This is
typically done through non-disclosure/non-use/non-circumvention agreements
(NNN) specifically created for use in China. It is standard practice for
foreign partners to present a NNN when entering a contract with a domestic
Chinese firm.
6.6. The non-disclosure aspect of the agreement
is typically aimed at protecting IP from being shared with third parties within or closely related to the domestic firm. It
is common practice for Chinese businesses to share this sensitive information
with subsidiaries and manufacturing partners. A strong non-disclosure agreement
will aim to prevent this.
6.7. Non-use aspects of a NNN agreement focus
on two issues: identifying the agreed upon uses of IPs
and preventing the domestic firm from producing a similar product under its own
trademark. To prevent misinterpretations, agreements should be clearly
translated and concise in what constitutes acceptable use of foreign IPs. There
should be a clear and agreed upon understanding between both parties that the
domestic firm is solely approved to use the IP in question to manufacture
products for the foreign company. The second aspect on the non-use agreement
aims to ensure that IP like trade secrets remain protected. Because trade
secrets or special manufacturing processes may not be covered under copyright
or patent laws, it is important to ensure confidentiality through the non-use clause
of a NNN.
6.8. Non-circumvention prevents the domestic
Chinese partner from selling the product directly to the foreign investor’s
clients. Circumvention is common in China and this aspect of the NNN is
critically important.
6.9. There are further steps that companies can
take to ensure that their contracts will be effectively enforced in China and
should not be overlooked. Make sure that the entire contract and
NNN are accurately translated and clearly list estimated damages that would
result from a breach of contract. These steps will facilitate the litigation
process in a Chinese court system. Do not expect a non-Chinese arbitral entity
to be an effective means of litigation as they have no jurisdiction or means by
which to enforce a ruling.
6.10.
Remember, DUE DILIGENCE is imperative in choosing a domestic partner. If
it sounds too good to be true, it usually is.
Understand everything there is to know about a partner before entering into a
contract with them: meet with them, view their facilities and offices, research
publicly available records. There are Chinese companies that will enter into
contracts with the sole purpose of trying to steal IP. The best way companies
can protect themselves is by having a strong contract, an iron clad NNN, and
preforming a thorough investigation of potential partners. Those steps alone
are typically enough to weed out the untrustworthy.
AMCHAM
CHINA:
http://business-center.amchamchina.org/login
The American Chamber of
Commerce in the People's Republic of China is a non-profit, non-governmental
organization whose membership comprises more than 3,800 individuals from over
1,000 companies operating across China. The chamber's nationwide mission is to
help American companies succeed in China through advocacy, information,
networking and business support services. AmCham China is the only officially
recognized chamber of commerce representing American business in mainland
China. With offices in Beijing, Tianjin, Dalian, Shenyang and Wuhan, AmCham
China has more than 60 working groups, and holds more than 300 events each
year.
CONTACT US
The Office Park, Tower AB, 6th Floor
No. 10 Jintongxi Road,
Chaoyang District, Beijing, 100020 PRC – People’s Republic of China.
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Tel: (8610) 8519-0800 / Fax: (8610) 8519-0899
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