BUSINESS IN CHINA

Why do business in China ?
Since China has entered WTO, China’s investment climate will be even more favourable to foreign investors. China is a large country with a population of 1.2 billion. With the sustained economic development, the purchase power of the Chinese people is increasing steadily, the Chinese market is flourishing, and its huge potential is displaying tangibly. This has provided a good opportunity for foreign companies of foresight to come to China to make an investment and undertake business.
Up to the end of September 2002, China has ratified an accumulative total of 414,796 foreign-invested enterprises with contracted investment of US$813.667.
For this reason, and for the fact that China is becoming the largest consumer market in the world, more and more foreign investors find their way into China for reasons of cheaper production costs for their products, avoidance of import tariffs by servicing the market locally and in some cases, building market share by selling their products in the market as 'Chinese' brands or just by having a permanent company presence in the market.

Types of business
China is a heterogeneous and complex market; therefore doing business in China is not an easy task to accomplish. The first things you have to ask yourself is in which part of China do I want to do my business in and what type of business do I want with China? Do I simply want to export or import and am I looking for an agent or do I see a larger market segment for China and I am looking for larger investments?
Each part of China can have a different climate, culture and resources but also different policies and tax advantages. China is a transitional country in reform, and now that is has entered WTO, more policies and rules need to be changed. It is also very important to know information on the type of business you want in China, since one type of business may have more advantages to your line of business than another. We will try to provide you with the basic information you need to know for doing business in China. If you have any other questions, please feel free to contact us for some more information.

Import-export
Chinese foreign trade companies: The traditional Chinese Foreign Trade Company is a centralized company, which was appointed by the Chinese government to act as an import-export company. These companies held a license by the government and had the permission to carry out their business. Most of these companies were state-owned enterprises. Some of these FTC’s have expanded; some of the largest ones have branches abroad. Internet can be used as a medium to find your suitable FTC.

With China entering WTO, some policies are going to be changed. Recently privatized Chinese Foreign Trade Companies were also allowed and some big state-owned enterprises got a import-export license who export the products independently. Currently there are some experiments for Chinese-foreign joint ventures FTC’s but this experiment is still in the starting phase.

Local agent: Some companies operate through a local agent to sell their products locally. These local agents do not have an import/export license and distribute the purchased FTC products. Disadvantages of having a local agent are that reliable agents are sometimes hard to find and that the network or the operating area of a local agent is limited. Therefore a lot of companies have more than one agent in different provinces or locations in China dealing in their particular area. An advantage is that the agent contracts are not bounded to strict regulations.

Representative office
One of the most popular business forms for foreign companies is the representative office. A representative office can only act as a liaison between the home office and trade organizations or related industries in China but is more advantageous than a FTC or local agent. It allows the company to gain experience and acquire a better understanding of the size and potential of the market in China. They use this representative office to lay out their long term goals and oversee their other business operations or joint ventures in China with a minimum of investment.
This type of enterprise form is easy to change into a WHFOE or joint venture. Unlike a joint venture, this is a more reliable enterprise form since you don’t have the problem of unreliable Chinese partners.
The representative office is also an effective tool to convince the Chinese that their foreign counterpart is serious about the China market. The establishment of a representative office assures the Chinese partner that their counterpart is in China for the long term. Chinese executives frequently express their uneasiness about the commitment of the foreign party during negotiations by telling stories about the foreign company that came to China to negotiate a joint venture and then disappeared. The establishment of a representative office can also enhance the foreign party's bargaining position by switching the burden of urgency from the foreign side (who was far away from home and was in a hurry to return with a signed contract) to the Chinese side (who sees a potentially profitable relationship and does not want it to be stolen by another company).
Branch office
Foreign service enterprises such as banks, insurance companies are allowed to open a branch office. Unlike a representative office, a branch office can carry out profitable activities but is not a legal body.

Joint venture
There are two types of joint venture: the equity joint venture and the contractual joint venture.
This business form has existed for a long time. The success for a joint venture partnership lies in finding the right business partner and carrying out negotiations on a truthful and honest basis, some enterprises have bad experiences in setting up joint ventures due to unreliable partners.

For some industries such as telecommunication and transport, a joint venture was the only legal form of business opportunity for foreign enterprises. Since China has joined WTO, some policies on joint ventures are changing : foreign investors are getting a larger access to the Chinese market to sell their products. A joint venture can now decide where to buy their production means and natural resources. They do not longer need to keep the incomes and expenses in foreign valuate in balance and they do not longer need to report to the government on their production plans.
WFOE

Wholly foreign owned enterprises are foreign enterprises on Chinese ground that is fully financed by foreign capital. This type of enterprise has a lot of benefits since the policies were favorable and didn’t affect the company management. Due to China’s entry in WTO, China has cancelled most of the regulations concerning WFOE namely exporting more than 50 percent of the yearly production, and producing high-tech goods or import substitution, the monthly rapports to the local authorities and the obligation to buy local materials.

One of biggest advantages is the protection of intellectual rights.

Nevertheless, it is forbidden to set up a wholly foreign owned enterprise in the following fields:
- Media
- Trade
- Post and telecommunication
- Insurance

Holding companies
A holding company is a company, which can unite all investment projects in China. The holding company is a sort of headquarters inside China with limitations and bound by regulations. Mostly multinationals are setting up holding companies to make the organization in China easier.

Joint-stock companies
A joint-stock company is allowed to give out A-shares and B-shares on the Chinese stock exchange.

Franchising
China doesn’t have any fixed legislation on franchising, nevertheless it already exists e.g. McDonalds, Kentucky Fried Chicken,

Licensing-technology transfer
Technology transfer in China is mostly done through joint ventures. Direct licensing is not recommended. For transferring technology to the Chinese counterpart, a good lawyer is recommended.

Problems and success in China
- Preparation
- Choosing the right business form
- Cultural differences
- The large size of the country
- Different markets inside China
- The concentration of consumers

Business tips
- Chinese culture
- Chinese etiquette
- Negotiation with Chinese counterpart
- Business trip preparation
- Choosing your strategy

China regions
China is not one market. Each province, even region or city can be seen as one market segment. Because of the largeness of the country, the different cultures inside China, different development level amongst the different regions and provinces and therefore a difference in purchasing power and last but not least the infrastructure.

For information on growth markets in China:
South-China
East-China
North-China

For information on emerging markets in China:
Northeast China
Central-China
Southwest China

For information on beginning markets in China:
Northwest China
West-China

Economic Zones:

Go West policy: