Are you interested in doing business in China and want to know what it entails? If YES, here is a complete guide for starting a business in China for foreigners.
Almost every Fortune 500 company is well established in China; from Apple, Microsoft, Oracle and Google, to Nokia, HP and Facebook. With a population of over one billion and a fast growing economy; China is definitely the next best place to situate and open a business.
Table of Content
- Why Start a Business in China?
- 4 Things to Do Before Kick Starting your Company in China
- 3 Questions to Answer Before Starting a Business in China as a Foreigner
- Challenges of Doing Business in China
- How to Overcome the Challenges of Doing Business in China
- Understanding the Chinese Culture
- Dealing with the Chinese Government
Why Start a Business in China?
China is a unique country that has loads of positives that support businesses in all stages of growth. China is the country that has the largest population in the world; with a population that is in excess of 1.35 Billion people. China is located in the Eastern part of the Asian continent and with Beijing as its capital city and seat of power.
Other key municipalities in China are Shanghai (the largest city in China), Tianjin and Chongqing and China also oversees Taiwan, Hong Kong and Macau. In as much as China is the most populous country in the world, China is also the world’s third largest country in terms of land area.
The Chinese economy is one of the fastest growing economies of the world, and the country has been attracting foreign investors ever since it started its economic growth spurt. A lot of factors account for the increasing number of foreign entrepreneurs found in the country, and chief among them is China’s inherent ease of manufacturing and its massive base of goods-oriented consumers. Additionally, China’s overall financial stability has made it an attractive option for those looking to start their business overseas.
The Chinese economy experienced astonishing growth in the last few decades that resulted in the country being named the world’s second largest economy. Since the introduction of the Chinese economic reforms in 1978, China has become the world’s manufacturing hub, where the secondary sector (comprising industry and construction) represented the largest share of the GDP.
Often called the “World’s Factory,” China is the world’s largest manufacturing economy and exporter of goods. China is also the world’s fastest-growing consumer market and second-largest importer of goods. As of 2016, China is the second largest trading nation in the world and it plays a prominent role in international trade.
Some of the positives you may get in China are; cheap and reliable technology, cheap and highly productive workforce, fertile land and good weather, etc. China is also the country that as the second highest purchasing power parity when compared to the rest of the world.
China’s economy is a diverse one in the sense that all key sectors in the economy is truly in a thriving one. The Agric sector, the manufacturing sector, the technology sector, the oil and gas sector, the automobile industry, the tourism sector, the pharmaceutical industry, just name it, are not push over when compared to that of top countries in the world.
No doubt China is considered as one of the best countries in the world to establish your business, and little wonder almost all the Fortune 500 companies have their presence in China. So, here is a guide that would take you through the extensive procedures required to start and run a company in China.
4 Things to Do Before Kick Starting your Company in China
- Find a Guide
As a foreign investor, China would typically be a strange land to you, and as such you would need someone to help you navigate the waters. This of course does not guarantee smooth sailing but it will help you avoid many pitfalls along the way.
For the guide to be most beneficial to you, it must be a local company or partner. Your partner will fill your need for connection in the country. You will have to choose your guide wisely as trust shouldn’t be given too easily in China. A trusted partner will help you build a good foundation before putting together your plans.
Relationship is known to be very important to the Chinese, and you need to develop them. This is a task that could prove daunting if you don’t speak the language, that’s why you really need that guide. In addition to having a guide, you need to of necessity understand the Chinese culture and language because it would get you out of a scrape or two.
- Find a way to adapt to the business culture
China’s job market and working practices are really different from those of other countries. For example, there is huge job turnover in China as the Chinese change jobs quickly for better salary elsewhere. Also, the most talented employees still prefer big companies over startups.
Empowering your employees and making them understand and be part of the company process is key to surmounting this obstacle. Transparency too should be practiced as this is not a strong point of many Chinese companies.
Again, no matter how you adapt, you must still recognize the fact that you are a foreigner. For instance, it does not make sense for a westerner to go after market where his identity won’t be a plus, as the Chinese sometimes don’t trust foreign businesses that set up in certain sectors.
So, you need to embrace that fact that you are a foreigner, and use it to your advantage and focus on markets and applications where this is considered a quality. Your guide would advise you more on this.
- Go mobile
Most of the Chinese population is super digitally connected, and as such they spend a lot of time online. Your business must take this into consideration and must as such have an online connection. Think e-Commerce before a traditional shop, invest in online communication and advertising before traditional media (TV, press, radio etc.), and go mobile, Chinese people love their mobile a lot.
- Get a working strategy
Another thing to consider when intending to do business in China as a foreigner is strategy. The right China market entry strategy would help you boost your chance of success in business, it would help you save time in understanding a totally different culture, save cost on unnecessary expenditures, get market insights quickly through affordable.
But effective methods, obtain guidance from the early stage of your business in the China market, have a local presence to get accurate information, avoid the common mistakes made by foreign brands with limited knowledge of China market and lots more. You can definitely not do without this.
3 Questions to Answer Before Starting a Business in China as a Foreigner
a) Is Your Business idea is Open to Foreign Investment?
Many key sectors welcome foreign investors in China, but the reality is that not all sectors do. The very first thing to do as a foreign investor in China is to find out if your intended sector is open for foreign investment.
Sectors like medical institutions, education and automobile manufacturing etc are still closed off to foreign investment, though the country is contemplating opening up automobile manufacturing. It is therefore essential at first to learn about the evolution of your industry in the Chinese market. Learn what kind of freedom you have to operate, and if your product would be suitable for the market.
b) What Business Structure Would You Set up?
This question is very crucial for they are certain business structures available to foreign investors, and each has its pros and cons. Typically, the choice of the structure for your business would depend on the weight of the initial investment. Here is a list of some of the main structures available to foreign investors:
The Wholly Foreign Owned Enterprise (WFOE) business structure is a limited-liability organization that has a shareholder, or an investing entity, and allows foreign business owners to manufacture, trade, distribute, and deliver products and services in China without having to partner with a Chinese business.
The procedure leading to its creation is heavy and the minimum capital required can be very important in the function of the business activity. When registering for a WFOE, there are generally three options available to foreign enterprises and they are;
- Consulting & service WFOE: This entity allows a business owner to provide services and consultancy activities to customers in China on behalf of the foreign investor
- Trading WFOE: With a trading WFOE, a foreign business can engage in wholesale and retail trading, it can import and export, it can buy goods in China, and it can sell and distribute.
- Manufacturing WFOE: This structure makes it possible for a foreign business to assemble and process equipment or products in China. The structures are to be utilized depending on which business you want to start.
- Joint Venture
This structure requires a Chinese partner. Joint Venture is a special form of company registration in China where there is both a mainland Chinese party and a foreign party. When China started opening up to foreign investment, JV was the main method for foreign companies to get into the Chinese market and they did this by partnering up with a local Chinese company to create a joint venture.
Business owners can use a trusted online foreign exchange service to minimize the costs of paying for legal counsel – or any other related expenses while expanding their business to China
- Representative office
Opening a Representative Office is a reasonably simple way for a foreign company to have a limited presence in China, but there are heavy restrictions on what they can do. For example, it cannot directly employ any staff or even collect any money. It is thus not possible with this type of structure to sell products or services, or even generate profits. The structure therefore exists to represent and communicate about the main company in China.
c) How Do You Intend to Finance the Business?
This issue is also crucial. You have to respond to the above question before talking about cost, because the cost will be very different and significant if you create a WFOE. It is therefore necessary to budget the cost of the whole operation after you must have picked your business structure.
If you do not have the cash down, then know that you have to seek financing from your home country. Certain agencies from different countries do make aids available to help entrepreneurs to expand abroad. In the case of France, there are support and state guarantees such as “Pret export Bpifrance” or the “Assurance Prospection COFACE”. You need to research your home country to find out if such is available for you, if not, you have to seek for loans.
d) What Taxes are Applicable to your Business?
The fiscal environment in China is constantly changing, especially with the law passed in 2007. Income tax is 25% today, but there are differences depending on the sector of activity or place of the implementation. You will need to learn about the tax rate applicable to your business so you would know beforehand what you are getting into.
Starting a Profitable Business in China as a Foreigner – A Complete Guide
1. Have a viable idea: the very first step to starting any business is to conceive an idea that is viable and has the potential to be profitable when implemented. Next, you should make some investigations and inquiries from the people who are in the niche you wish to go into.
2. Choose your business scope and structure
It is very important to check your business type against China’s list of restricted industries to ensure you choose the correct business. You may want to also check the catalogue of encouraged foreign businesses to see what types of incentives you might be eligible for.
As far as scope is concerned, you will have to make sure that you have a good balance between being too broad and too limited. Businesses covering broad scopes tend to be denied permits, while a limited scope can get you in trouble down the line if you are found to be operating outside of it; and the Chinese government would always find out, you can trust them on that.
3. Choose an agency or legal firm that will help you through the process
Starting and running a business in china is complex and more complicated for a foreigner. If you think that you can do it on your own, then you need to think again. It is necessary to trust a professional that not only speaks Chinese fluently, but is also competent in legal and fiscal matters. This should be one of the first things you should do. You can find these agencies online or through referrals.
Choose the right location; it can make all the difference in the success of your business. First, get to know the big cities. Shanghai, Beijing and Guangzhou are the major business, government, and industrial centers. The very nature of your business may require you set down in one of these big cities. If you are a tech company, for instance, Beijing may be the place for you.
The Chinese government provides subsidies and rebates to encourage investment in certain areas of the country. Pay attention to suppliers’ hubs and distribution centers, client bases, export/import logistics, regional and local tax rebates, and staff residence.
Your location sometimes would depend on whether you are selling a good or running a service. You typically should consider transportation needs, logistic needs, source of raw materials, government restrictions etc. when choosing a location in China.
Once you have settled on a region, you have to find an office since you will need proof of a lease to register your business. Whatever space you choose though, make sure it is zoned for the type of business you are planning on opening.
5. Choose a business entity
Before you register with the government, you need to decide what type of business entity to register. The most common for foreign businesses are joint ventures, representative offices, and wholly foreign owned enterprises, and each has been explained above.
A joint venture requires a partnership between a foreign business owner and a Chinese citizen. Though joint ventures may sound like the safest route, experts warn against them. Critics say the most common problem with joint ventures is no more than a classic case of “same bed, different dreams” syndrome. In addition, the have a very high probability of failure.
Representative offices are an easy, low-cost way to go, but it drastically limits the scope of what you’re allowed to do in China. A representative office is just there to represent your offshore entity. In other words, you cannot deliver any services or products, which means you also cannot generate revenue. A representative office affords you little more than the ability to show your face and build your brand name.
The most common type of entity is the Wholly Foreign Owned Enterprise, known as a WFOE. It is on record that more than 75 percent of American investments in China these days are 100 percent American-owned facilities because it gives business owners maximum quality control.
A WFOE is quite complicated to set up. It takes more time to get approval from the government, and it requires a minimal capital investment that you must put in a Chinese bank, though the amount can vary greatly depending on the nature of your business and where you’re setting it up.
A detailed five-year business plan is crucial, because once the government approves it, you will be able to operate only within the guidelines of your plan. If you start offering a product or service that is not in your business plan, the Chinese government can easily shut your business down.
The same goes for where and how you operate. So you need to make sure that your business plan is as broad as possible to allow the company to operate freely. While it needs to be broad, it should also be specific.
Make sure you include your location, projected revenue, product or service description, expected number of employees and budget requirements etc. in the plan. You may need professional help to develop an acceptable business plan that would not put your business on the spot in future.
7. Find a liaison: irrespective of how knowledgeable you are; your business will still not go far without the aid of a consulting a representative to register your business. There are tons of organizations in the united states that can help you navigate the complicated application process.
Consult the U.S.-China Business Council or the Ministry of Commerce at the Chinese consulate. It is also advisable to get in contact with the U.S. Commercial Service office, which can direct you to local desks throughout China. All of these resources should be able to recommend a trustworthy international corporate lawyer for you.
You should beware of local Chinese business agents that charge $800 for a translation of the business application. There is a very little probability that your company will get registered if you use them. Perform thorough background checks or talk to other American business owners to find out who they used to register.
A qualified liaison should be able to tell you where you need to go to register, whether it’s the local, provincial or national government, and should do the talking once you get there. You need somebody who has negotiated that territory a number of times before and you absolutely need to have people who speak Chinese to go and meet with the local officials.
8. Get your documents in order
The documents you will need to start your business in China include:
- Certificate of Incorporation, Articles of Formation (or the equivalent) certified by the Chinese embassy or Chinese consulate.
- (2) Copies of the passports of each investor certified by the Chinese embassy or consulate overseas.
- Bank references from each investor’s bank declaring good standing.
- (2) Copies of the passports of the parent company’s director, the Chinese company’s legal representative and the Chinese company’s supervisor (if applicable).
- (6) 2”x2” photos of the Chinese legal representative along with a brief resume or CV.
- Registered capital.
- Business scope.
- 8 proposed Chinese names for the company in China.
- The Chinese office address, including (2) copies of leasing contracts, certificates of real estate ownership as well as landlord identification.
- (4) Copies of a letter of authorization.
If your WFOE will participate in manufacturing, you’ll also need:
- Purpose and estimated investment
- The enterprise’s operational structure and number of those employed
- Permission for land use
- Environment evaluation report
- Details of products
- Size of production
- Detailed list of equipment used
- Business plan
- Environmental protection measures
- Requirement for the utilities of the site such as water and electric usage
9. Apply for approval
In China, your business must be approved through two separate entities: the Ministry of Commerce, and the State Administration of Industry and Commerce. And your documents must be submitted in the Chinese language.
Your approval is contingent on your scope, especially in “restricted” sector businesses. Typically if there is a problem with your scope, one or both entities will require you to amend it. It is possible for your approval to be denied altogether.
If your business falls in the “encouraged” sector, you’ll also need approval from the National Development and Reform Commission. Your application can take up to 90 days, and is subject to further verification that could extend the timeline.
10. Get your product or company trademark
A lot of foreign investors would tell you that Intellectual property violations are a big issue in China. Quite a number of United States manufacturers feel that because they have a trademark at home, it will hold up in China, and they ended up paying dearly for that thought.
In China, the first person to register a trademark owns the rights to it, regardless of whether or not that person is the first person to use the trademark.
So note that you can end up losing money and time to people who would not hesitate to cash in on your ignorance. So you have to of necessity get your product trademarked no matter how popular the product is in your home country, and regardless of whether you have already trademarked it in your home country.
11. Register and open a bank account
After you have received your approval, you must register with the Chinese Administration for Industry and Commerce (AIC) and apply for your business license within 30 days. You will need a new set of documents to get your business license, and they include:
- The application form
- Articles of Association
- Approval certificate
- Company name, as approved by the AIC
- Business licenses of all investors
- Letter of recommendation from the company’s bank
- List of directors, managers, supervisors, and legal representatives
Note that additional documents maybe required, but this list generally gets you covered. Once you have your business license, you’ll be able to open a Chinese bank account.
If you’re dealing with a bank that doesn’t have any relationship with banks in your home country, then it makes it tough to keep track of your money. So, make sure that your bank in your home country and your bank in China have some sort of corresponding relationship
12. Other possible approvals/registrations you would need
Besides opening a bank account and depositing the registered capital, here is a list of some of the approvals (or registrations) that you need to get after getting your business license:
- Approval from the PSB (Public Security Bureau) of the company
- Registration with the Tax Bureau
- Registration with the Customs Office
- Registration with SAFE (State Administration of Foreign Exchange)
- Hire an accountant (the accounting books are mandatory in China)
13. Tax considerations
The following are the taxes that may be required of you to pay while you run your business as a foreign investor in China. Note that others might be inclusive.
- Corporate Income Tax: roughly 25%, but variable
- Turnover tax: tax on sales, between 3-5%
- Customs duties
- VAT: about 17%
- Individual income tax
14. Hire your staff
Hiring staff in China is a delicate process, especially when it comes to hiring managers. Don’t assume that just because a person’s English is impeccable that they will be able to run the business properly.
Though language skills are greatly beneficial, but it is far more important to have a smart business person in that role that’s going to run the company the way you want it run.
You can try reaching out to human resources consultants and headhunting agencies in China, and you should also set your sights on American-born Chinese or Chinese citizens who were schooled in America. Note that good talent doesn’t come cheap, so if you want the best, you have to be willing to pay them what they are worth.
Once you have trusted managers in place, they should be able to assist you in hiring the rest of the staff. You need to set up contracts for your staff so you would not get into trouble with them when you fire them.
Challenges of Doing Business in China
Despite the fact that the economy of China is still upward bound, but the country can be tough for small businesses especially businesses started by foreigners. In fact, the latest World Bank annual ratings ranked China 78 out of 190 economies in the ease of doing business, showing that foreign entrepreneurs looking to start a business in China do pass through a lot of hurdles.
Though these hurdles are real, but they can definitely be mitigated if an investor knows his way around. So, listed here are the extensive challenges you will face when starting a company in China.
- Language difference
- Cultural difference
- Finding Manufacturers that are technically capable of producing your quality standard
- Timing and loyalty
i. Starting a business in China especially as a foreigner can be quite unpredictable. So in addition to your main budget, it would be to your advantage to set aside additional budget to pay for unexpected expenses like government fees, fines, agency fees, gifts, etc.
For instance, it may take you months just to get the operating license from the government for your location, and in all those time, you would still need to pay rent and utilities without any income. Besides paying for operating costs while waiting for the business to open, you may also receive ridiculous charges from real estate developers if you are opening an office or store.
So if you plan to spend US$200,000 to start a company in China, you had better prepare at least an additional 50% budget to meet with all the unexpected expenses.
ii. In China, the laws and regulations are very detailed but oftentimes hard to follow to the latter. It takes strong relationship with different government agencies to navigate and get things done, i.e., getting approvals. The inherent bureaucracy and inefficiencies sometimes noticed in government systems have created business opportunities for Chinese middle-men.
These agencies usually have good connection with government officials, sometimes opened by family and friends of the officials, and are able to get things done faster and simpler for a fee. There is pretty much an agency out there that can help with any matter related to the government. Of course you can choose to ignore these middle men and follow the straight legal route, but you have to be very patient and have a high level of tolerance.
iii. You equally have to note that if you finally beat the million odds, and finally become successful, the Chinese are going to copy your product, and even do a better job than you. They will make the same product, and they would do so at lower cost; and will generally have far better commercial and political connections to out-compete you.
This is one reason why it is generally suggested that foreigners starting businesses in China focus more on service-focused business, rather than products which can easily be copied. You can most definitely give it a try if you have loads of money to pump into publicity for your product and enlarge your business before your product gets copied.
But if you don’t, then it is better to focus on setting up a company that provides services. Not only are the Chinese generally poorer at copying service-based businesses, but there is also a general attitude among the Chinese people themselves that foreign services are superior to Chinese ones.
How to Overcome the Challenges of Doing Business in China
- Be Prepared: – Read books about the Chinese, their business culture and attitudes. This will help you understand your Chinese partners/associates.
- Have credible Chinese partners to help with your operations.
- Get an interpreter if possible
- Assess your suppliers or manufacturing outfit and be sure that they meet your standard
- Don’t put your trust on product samples. Have an inspector standing by to oversee your production process.
Understanding the Chinese Culture
Before stepping your foot in China to do business, it’s advisable you know and understand how the Chinese culture works. By being knowledgeable of the environment, as well as the values of the people in it, you will have a greater chance of achieving success in business.
China, just like any other country, has its own norms and religion and though these two may not be as essential to other nationalities, it is actually significant, if not crucial, in the everyday lives of the Chinese so you must always take note of this as it can actually make or break your business.
It is a no-brainer that not only should you learn the traditions and customs in China; you must also study how business works in China. There are different business settings around the world and while some countries adhere to firm and plain practices, Chinese businesses prefer to be adaptable and flexible and these characters are found to be very effective.
Furthermore, studying the ways on how to do business in China also mean actually being there; and being friends with people there. Not only will you have to do away with complete foreign business principles but you must also avoid planning on solely handling the business; as a local influence will always be an essential factor.
You should also consider looking for a Chinese partner, who will not just be able to boast his nationality, but also his experience in both business and management. Also, it is not enough that you get yourself a Chinese business partner, you must also have local employees so that they may somehow contribute to the economy; and it will surely look good in the company’s profile.
Dealing with the Chinese Government
An important factor to consider when doing business in China is to strive to be on the good books of the government. The Chinese government has a very essential role in the business industry and foreign investments; and that is why having the necessary paperwork and the important authorization must always be prioritized to avoid the hustle bustle. When it comes to these things, businessmen are always expected to know that in China, no monkey business is tolerated; none at all.
And while there are other countries that are always booming when it comes to their business industries, you should not always expect the same case in this beautiful Asian country. Though China is building its strong reputation for being the “next big thing” when it comes to economy, it does not however guarantee fast money.
As with almost every business endeavor in this world, it takes time. Patience and resourcefulness will be the most ideal traits you must possess when considering starting a business in China.
However, you should not be discouraged by this because though it will take time, doing business in China will nonetheless be both fulfilling and fruitful. So why wait now that you have known how to do business in China? How about actually engaging in that business?
Starting a business in a foreign environment is difficult; much less one as notoriously difficult for foreigners like China, but that does not mean that you should not go. You just have to focus on your strong points. Focus on what you are good at, and adapt the formula to suit China.