Basics about Setting Up Business in China (Republish)

A few days ago, I ran into this article intended for Australians who want to set up business in China.  It discusses eight (8) basic elements that each businessperson  needs to know before charging into China.  I thought it was pretty good, and would like to share below.

1.  You have more than one way to skin the cat.  Namely, you can do joint ventures, wholly foreign owned enterprise, or a representative office.  Each form of business entity has its own advantages and disadvantages, and they have been well discussed by folks at China Law Blog and China Briefing.  Not to keep beating the dead horse, but you need to know that a representative office is not a really good way to go if you want to conduct business on the ground in China.

2.  Articulate clearly what you intend to do in China.  If you have a business idea/concept, you need to be able to articulate how you plan to execute that big plan, how you intend to make money.  A vague idea will not do.  This is so because when you fill out all your application materials, you have to draft, by yourself or through your lawyer, a feasibility study, which has to be somewhat detailed in describing your business.

3.   Pick your spot in China.  Even though China is big, places suitable for your business might be few.  Take full advantage of the tax breaks on the table courtesy of the Chinese government.  Western and central provinces still have nice tax cuts to hand out.

4.  Put down your minimum registered capital.  The local industry and commerce bureau office/administration where you submit your application will determine, pursuant to your business plans and feasibility study, how much minimum capital you need to inject.  You may contribute a part of your IP or equipment toward that registered capital, but they set the cash-equipment ratio for you.

5.  Treat your Articles of Association seriously.  This is a very important piece of governing document for your business in China because the business scope therein may impact your ability to repatriate profits back home.  If your actual business scope is larger than the scope described in the AOA, problems may arise since you are technically doing part of your business illegally.

6.  Take care of your labor relations.  Enough has been said and discussed about China’s Labor Employment Law.  Even though enforcement is pretty lax right now due to the global economic crisis, don’t count on the Chinese government to cut you some slack all the time.  Do it right from the start.

7.  Know your local partner.  Dances with Wolves might be romantic, but it is also dangerous.  No kidding, go ask Danone, Inc. if you have doubts about this.  If you want control of the joint venture, make sure you know exactly what it means to control a business in China from a legal stand point, i.e. stock ownership, having a trustworthy local manager, be in charge of that all powerful corporate seal, etc.

8.  Develop local relationships.  This includes relationships with your employees, staff, local government officials, suppliers, etc.  An earlier postdiscuss how to do this.

These are very basic stuff for preparing to do business in China, and I’d like to add the following:

9.  Protect your intellectual property.  If you got intellectual property components in your business, treat like they are yours.  China will protect your IPR in trademarks, patents, copyrights and trade secrets if you take the initial steps toward safeguarding them through proper registration, recordation, and non-compete/nondisclosure agreements.  I disagree with assertions that China has no IP laws.

10.  Be patient.  Things WILL take longer than you planned.  Simple as that.  I’m not saying that the Chinese are inefficient or incompetent; I am saying that things will go wrong, little things, like renting a place for your business and the landlord has no proof of land ownership, like you don’t have a board resolution for something.  Similarly, things will be different with handling your local staff.  They have different experiences and expectations, and you have yours.  It takes time to mesh.

11.   Find the nuance.  China changes quickly.  Its laws, regulations, macro socio-economic factors all change constantly.  It’s hard to imagine a business will thrive in an country with impactful yet nuanced changes in its business and legal environments.  The Chinese government adjusts its macro economic policies constantly in accordance with local and global shifts.  For example, when the economic situation got worse in the last two quarters, China quickened the pace for granting business license to foreigners (Read China Law Blog’s latest post.); when China wanted to slow down exporting and start to make its growth more sustainable, it stopped the VAT rebates to exporters (available yet again recently), and put a ban on certain manufacturing in parts of China.  To be able to survive China, a businessperson must be constantly on the lookout for nuanced changes in China.

12.  What can you do for China?  ”Ask not what your country can do for you; ask what you can do for your country.”  While you contemplate business success in China, ask yourself what you can do for China.  It maybe creating jobs, generating tax revenue, contributing to charity, setting up university scholarships, making available internship opportunities for local students, or whatever.  Small measures of kindness, small gestures of friendship will make you a “hero,” rich and successful ultimately assuming you do 1-12.  The Chinese almost “deify” foreigners that do stuff for China.  Consider the Flying Tigers, Dr. Henry Norman Bethune.  Of course, you don’t need to be a savior, just do something while you make money.