quinta-feira, 23 de junho de 2016

[272] AMCHAM CHINA: CHINA BASICS FOR BUSINESS 2016



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 (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.


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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.
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