doing business in china: modes of entry

Copyright @ The JLJ Group. All rights reserved. May 2009

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DOING BUSINESS IN CHINA: MODES OF ENTRY

Prepared by The JLJ Group – Solutions for China Entry & Growth


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AGENDA

• The Big Picture

• Modes of entry in China


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CHINA: A CONTINENT MORE THAN A COUNTRY

Company~Km 3500

~ Km 5,000

Area 9.560 M sq km

Population 1.3 B

GDP¹ (’08) US$ 4.4 Trillion

Administration 33 (+1) administrative areas (656 cities, 48000 districts)

22 Provinces (not including Taiwan)

2 Special Administrative Regions – Hong Kong, Macau

5 Autonomous Regions Guangxi, Inner Mongolia, Ningxia, Tibet, Xinjiang

4 Municipalities – Beijing Chongqing, Shanghai, Tianjing

Language Mandarin Chinese+ 7 major dialects and 80+ minority languages

Hierarchical government structure: central – region – province – municipal – district – local


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CHINA, KEY GLOBAL DESTINATION FOR FDI

FDI in 2008: 92.4bn ~24% increase over 2007 – however growth slowed at the end of the year (-14 % in Nov. y-o-y)

Source: National Bureau of Statistics


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Pudong, Shanghai 2008Pudong, Shanghai 1990

THE PACE OF CHANGE IN CHINA…

…is striking and far outpaces that of any developed country


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DOING BUSINESS IN CHINA Snapshot

• Opportunities in China do exist - country has been opening up, growth rates are impressive, population is getting wealthier, FDI have been pouring in…

• However, competition is fierce; China market should be approached gradually, un-emotionally and with realistic expectations

• Long-term vision is a must, quick profits are unlikely – time, money and effort are necessary

• There is no such a thing as one China market, rather several regional/ provincial/ local markets

• Applying the logic and mindset of the mother country would not work - gaining local knowledge of business environment and practices is crucial

• Conducting proper due diligence, developing a sound strategy, and finding the right partners may also be key success factors

Opportunities in China do exist – proper preparation and planning are key


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AGENDA

• The Big Picture

• Modes of entry in China


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MODES OF ENTRYSnapshot

• Business setup process difficult for foreign companies to navigate due to complex bureaucracy and regulations - laws & regulations constantly changing

• Regional differences may exist; national regulations may differ from local applications

• There are three main legal setup options in China – Rep. office, WFOE and JV, with different capital requirements and business scopes

• NO one solution for all companies; solution depends on specific company’s business and objectives for China

• When deciding on the optimal legal entity, look for advice and assistance from professional service providers – getting it right from the start is key

Key to leverage reliable service providers and get it right from the start


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NATURE OF THE INVESTMENTForeign Investment Catalog

When considering setting up in China, first step is to check the catalog


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FOREIGN INVESTMENT CATALOGLegal Set up Options

Allowed business scope depends on specific sector and type of entity


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NATURE OF BUSINESS

Import/Export Rights

Domestic Distribution

Capital Requirements

Registration Complexity

Service Activities

Rep. Office

Manufacturing WFOE

Service WFOE

WFOE’s provide greater flexibility for future operations

FICE


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CAPITAL REQUIREMENTS Injection Methods

Total Investment Registered Capital

• Complete injection within 6 months

-or-

• Capital contributed in installments: 20% within first 3 months with the remaining

injected within 2 years

Currency: US Dollars

Investment capital ratio depends on total investment


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CAPITAL REQUIREMENTS Investment ratio example

Registered Capital

Total Investment

Example 2

Equity (100%)

Registered Capital

Total Investment

Example 1

Shareholder loans are an alternative means of profit repatriation


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WHAT ABOUT INCENTIVE PROGRAMS ?Latest Trends

• The economy slowdown has spurred local governments to provide additional incentives for establishing FIE within their jurisdiction

• Recognizing encouraged statuses before official approval• Reduced tax rates for local portion of corporate income tax • 2/3 Tax holidays• Reduced fees for land-use rights• Subsidized housing

• However, local incentive programs, once secured, may be tenuous at best, especially once the economy rebounds

However, special Incentives should not be the only priority in choosing a location


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BUSINESS REGISTRATION PROCESSWFOE Example

*Official company stamps required for many business and banking transactions in China ** Equivalent to a personal identification number for the licensed company •† This process can be completed at any stage following foreign exchange approval and registration with the tax bureau

Company’s Chinese Name Approval

Approval to Establish Company

Registration of Business License

Stage I: Licensing

Filing and Carving Seals*

Foreign Exchange Approval

Open RMB & Foreign Currency Bank Accounts

Capital Verification

Statistics Bureau Registration†

Enterprise Code Certification**

Registration with Tax Bureau

Stage II: Post-

Licensing

Update Business License

Stage III: Post-

Capital Injection

A complex process… but it can be done!


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FINAL CONSIDERATIONS

Be clear on objectives, level of commitment, and time horizon for China…

Things will take longer than you expect, patience (and persistence) are a must…

Be ready for steep learning curves and, for sure, some surprises...

Do your due diligence, biz environment is complex yet not impossible to grasp…

If you are considering a JV, make sure you have compelling reasons for it …

Get advice / support from professional service providers…

China’s business environment is complex – yet NOT impossible to grasp


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ABOUT THE JLJ GROUP

• One-stop service provider assisting foreign companies to enter & grow in China

• One of very few firms in China legally licensed to provide true full-package services

• Served 400+ clients from 30+ countries – from Government organizations to SMEs to Fortune 500 companies

• Offices in USA and in China – providing end-to-end service


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THANK YOU FOR YOUR ATTENTION! The JLJ Group

SHANGHAI OFFICE Suite 603-605

Oriental Center699 Nanjing West Road Shanghai, 200041 ChinaTel: +86 21 5211 0068Fax:+86 21 5211 0069

BEIJING OFFICE Suite 2002, Building 1

Blue Castle International Center3 Xi Dawanglu Road, Chaoyang DistrictBeijing, 100026ChinaTel: +86 10 65820268Fax:+86 10 65820251

BOSTON OFFICE 77 Martin Street, # 37 Cambridge, MA 02138 USA

Tel: +1 857 636 2596

Email: [email protected]

Website: www.jljgroup.com

Shanghai

Beijing

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doing business in china: modes of entry

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