WAYS TO ENTER CHINA MARKET- THE BASICS

WAYS TO ENTER CHINA MARKET

Direct exporting –B2C, C2C-goods and services from your country directly to the Chinese/Asian customer;

Indirect exporting- selling to a Chinese/Asian intermediary intermediaries can be agents, distributors, licensors, franchisees etc.;

Legal entity- establishment for distribution/warehouse operations and/or production.

Wholly foreign-owned enterprises (WFOE), joint ventures (JV) and partnerships.

WAYS TO ENTER CHINA MARKET

Features of Direct Export:

• B2B, involve a company which has a registered license for import/export according to Chinese laws;

• Company usually a buyer/importer, normally only a service provider/intermediary assisting with import across the border and handling international payment;

• Direct export used for services, technology, unique products of smaller quantity developed distribution network is not necessary;

• Have to deal with freight forwarders, banks and customs procedures-if not done by the Chinese import/export company.

ADVANTAGES AND DISAVANTAGES OF DIRECT EXPORTING

+ Low cost of investment/set up, B2B or C2C, e.g. ecommerce;

Higher profit margins, no intermediaries

+ Simple logistics shipping documenation;

+ Simple payment and settlements. Paypal, Alipay, etc.

- Low barriers to entry;

- Risk of customs delay (check HS Code, CCC Mark and CIQ Certificates, GB Code requirements);

- High financial transaction costs;

- Difficult to earn trust and develop relationships.

MORE ADVANTAGES OF DIRECT EXPORT

• More control over transactions and process;

• You know who your customers are;

• More trust from your customers;

• Faster and more direct feedback on your product from the market;

• Better protection for your trademarks, patents and copyrights;

• More control of marketing.

MORE DISAVANTAGES OF DIRECT EXPORTING

You have to handle all the logistics of the transaction (licences, standards, certification, labelling, shipping, customs;

• Requires more investment to get customers;

• Demands more responsibility from every level of your organisation;

• Response to customer slower than local agent;

• Must have local solutions for tech products.

FEATURES OF INDIRECT CHINA ENTRY

• Agents-direct representatives:

• Distributors- Work with local customers;

• The commission paid to an agent is typically lower than the margin of profit a distributor will make.

• Sales agents and distributors usually aware of policy and regulation updates, both locally and nationally;

• Understand market data and environment so fast market response;

ADVANTAGES TO INDIRECT EXPORT

Control over sales process;

• Freedom to agents and distributors;

• Agent familiar with competition;

• Agent aware of best selling, profit products with the highest margin;

• More influence on marketing;

• Inventory risk stays with manufacturer.

ADVANTAGES AND DISADVANTAGES OF DISTRIBUTORS:

+ More business risk shifts to the distributor;

+ Greater incentive for the distributor to sell;

+ No physical presence needed (no tax nexus);

+ Lower resources in monitoring distributors compared to customers.

- Concentration risk on distributor

- Loss of control of sales and marketing

DISADVANTAGES TO INDIRECT EXPORT

Must control agent activities and productivity;

• Controlling the agent’s work needs a lot of communication;

End cooperation- go to competition;

• Having agent could have tax nexus implications;

Consideration should be given to local law and double taxation;

• Maintaining stock inventory can be costly;

• An agent may be selling similar products as yours.

REPRESENTATIVE OFFICE

• Easy set up and acts as a liaison office, RO cannot engage in profit-making activities;

• Its main functions are to conduct market research, promote products;

• Conduct business activities on behalf of the foreign enterprise, liaise with European clients that have a presence;

• Limited activities -foreign enterprise is responsible for all liabilities but no minimum capital requirement;

• Subject to annual inspection conducted by the local Administration of Industry and Commerce;

• Pay taxes and comply with relevant local regulations.

WHAT RO CAN DO:

• Conduct research, surveys for its headquarter;

• Liaise with local and foreign contacts in China;

• Provide data and promotional materials to potential clients or trading partners;

• Coordinate activities of foreign enterprise in China;• Make travel arrangements for the foreign enterprise representatives and potential Chinese clients;

• May only engage in non-profit making activities.

SOME MINUS OF RO:

Pay tax but not make profit;

Cannot be transformed into WOFE;

Annual inspection and local compliance;

Limited to four foreign staff.

CHARACTERISTICS OF FOREIGN INVESTED PARTNERSHIPS

Easiest and most convenient way for foreign investors to set up;

A foreign invested partnership (FIP) is an unlimited liability business entity without minimum requirements on registered capital.

The investors/partners of an FIP can be comprised of:

• Two or more foreign enterprises or individuals, or;

• Foreign enterprises or individuals and Chinese natural and legal persons or other organisations.

REQUIREMENTS FOR FIP REGISTRATION

An FIP is not permitted in “prohibited” industries stated in the Investment Catalogue; • An FIP that seeks to invest in restricted areas will be subject to a close examination by the State Administration of Industry and Commerce (SAIC); • An FIP is prohibited to invest in industries which are “restricted to joint ventures” or where a Chinese party has to hold a controlling interest; • FIP must be approved and registered with the local industry and commerce departments of the province, autonomous region, municipality directly under the central government or sub-division; • No annual re-registration for FIPs as with representative offices;Validity term of 15 to 30 years.

CAPITAL AND PROFITS DISTRIBUTION FOR FIP Required to submit a confirmation of agreed consideration signed by all parties;

Measure permits the FIP’s partners Ways to enter the Chinese market to contribute capital in convertible or local currency.

Parties of the FIP may also contribute to the FIP’s capital in terms of intellectual property, land use rights and other property rights including labour investments.

Only the general partner may make capital contributions by labour service and according to relevant regulations.

A foreign general partner making contributions by labour investment shall submit employment licenses for all foreign employees to the official branch of SAIC.

FIP Profits distributed in the following sequence: (1) as agreed in the partnership agreement (2) in accordance with the decision of the partners through consultation; (3) following the percentage of capital contribution made by each party; or (4) equally among all the partners;

FIP is considered to be a flow-through entity so income tax is imposed at the partner level;

A legal person partner is subject to a 3% to 5% business tax and corporate income (15-25%),(10% withholding, 3-45% individual) (VAT 17%, 13% for basics),(Property 1.2% of original value or 12% rental) .

WHOLLY FOREIGN-OWNED ENTERPRISE :

A wholly foreign-owned enterprise -limited liability company owned by foreign nationals and capitalised by foreign investors;

WOFE -structure for companies whose main activities in China are manufacturing, selling products or provide services (e.g.research and development or business consultancy);

Companies trading, retail and distribution of imported goods must be registered as a foreign-invested commercial enterprise (FICE);

100% foreign-owned enterprise in industries that are conducive to China’s economic benefits, and not prohibited or restricted by the China government.

WHOLLY FOREIGN-OWNED ENTERPRISE :

1 For registration of a WOFE a business license is required;

2 Process can take up to a year depending on the business scope, investment amount and timely and accurate submission;

3 WOFE required capital contribution-amount may vary, depending on the local administration, the region and industry sector and the intended size;

4 Minimum registered capital for a single shareholder company is RMB 100,000;

5 For a multiple shareholder company the minimum registered capital requirement is RMB30,000;

6 Mandatory registered capital for a FICE is much higher;

7 The minimum registered capital required for trading (import/export) rights is RMB 1 million,

for wholesale distribution rights RMB 500,000, and for retail distribution rights it is RMB 300,000;

8 Local authorities will review the feasibility study and approve the investment on a case-by-case.

OTHER WOFE CHARATERISTICS

1. Registered capital together with foreign exchange loans (usually from the parent company) is the “total investment”;

2. Total investment is the maximum amount of money the parent company is allowed to transfer to its Chinese-registered subsidiary;

3. It is the only source from which the operations of a WOFE can be financed until it generates profits on its own;

4. The amount of total investment is strictly limited and supervised and license is valid from 15-30 years, renewable;

5. Crucial to prepare a business and financial plan and set the amount of total investment with future revenue and expenses.

ADVANTAGES AND DISADVANTAGES OF WOFE

• Protection of proprietary technology and other IPRs;

• Exclusive management control over all decisions and profits of its parent company;

• Sole recipient of investment vehicle profits, ability to issue invoices to customers in RMB and receive revenues in RMB;

• No Chinese partner, full control of human resources.

• - Very huge investments, business licenses, financial statements, bank account, etc;

• - Very long and expensive bureaucratic process

JOINT VENTURES (2 TYPES):

Two types of joint ventures (JVs) in China: the equity JV (EJV) and the cooperative (contractual) JV (CJV);

An EJV is a legal entity created by Chinese and foreign partners that hold joint operations and ownership of a limited liability corporation;

Shared-risks, both revenues and risks according to their respective registered capital contributions;

The foreign investor’s capital in an EJV must account for at least 25% of the registered capital (with exceptions);

Specific industries the Chinese party is required to have control over the JV, 51%;

Profit is distributed in the form of dividends to the parties in proportion to ownership interest or contract if CJV.

REGISTRATION AND APPROVAL OF JOINT VENTURES

Similar to WOFE;

Depends on the industry your company is in (special permits needed for certain industries);

Establishment an EJV is longer than a WOFE;

Approval is generally granted at the central level, but a proposed EJV may apply to the provincial bureau if it meets certain requirements;

• Business scope is aligned with the encouraged categories listed in the Investment Catalogue; • Total investment is less than 1 million RMB; • The EJV is self-financed; • It does not affect foreign trade quotas; and • It does not require China to allocate additional raw material.

WAYS TO ENTER CHINA MARKET

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