How to run your business in China?
Generally speaking, you may find different solutions and investment structures on how to approach the Chinese market. Certainly many factors shall be taken into account when making such important decisions.
The company that intends to approach the Chinese market shall focus on some key aspects such as the scope of business or the type of investment. The scope of business has an important value that needs to be carefully selected since the business activity description will appear on the business license and thus only those business activities included in the description can be followed, while any other activities that are not included in the description cannot.
RO - Representative Office
A representative office may be a useful way of investigating the Chinese market. It is probably the easiest investment structure to be settled in China for a foreign company but it naturally has some limitations. The RO is generally forbidden for any profit activities, thus the organization with an RO cannot issue invoices or engage in selling/buying or any other operational activities. Generally speaking, the RO is conceived as a “soft” instrument for researching the market through industry researches or networking activities.
RO is strictly prohibited by the law to sign contracts and deals on behalf of the parent enterprise and cannot in any case represent any firms other than its parent enterprise.
Some information may be found:
WFOE – Wholly Foreign-Owned Enterprise
A WFOE is the most common investment structure and can be owned by a foreign investor completely.
It can engage in almost any type of business, and depending on the activity, we can name mainly three different categories of WFOEs:
- Manufacturing WFOE: when the WFOE engages only in manufacturing
- Consulting WFOE: when the WFOE engages in consulting and services.
- FICE (Foreign-Invested Commercial Enterprise): when the WFOE engages on Trading, Wholesaling, Retailing and Franchising operations (it can be set up also as JV)
Besides the fact that a WFOE allows independence in creating and developing strategies or taking decisions, this type of enterprise can formally carry out business and issue invoices in RMB.
By the way, it is an important investment that shall be carefully considered.
- Fast decision making process
- No need to share with local partners technologies, know-how, etc.
- 100% ownership;
- No cultural problems
- Capital investment from one side only;
- Less possibilities of contact with the local market (knowledge of the market) and local society (gov. process)
JV – Joint Venture
A joint venture is a company that is partially owned by a foreign investor and partially by a Chinese partner.
Generally speaking, a JV is the most common way to set up a business in China which requires a local partner by law.
There are two types of joint ventures:
- Contractual JV (CJV)
This kind of JV allows the division of profits and losses according to the specific provision mentioned in the CJV contract.
- Equity JV (EJV)
This kind of JV allows the distribution of profits and losses according to the respective equity shares in the EJV. There is a minimum of 25% of invested capital necessary to come from the foreign company to set up this type of JV.
To sum up and be clear, here is a chart:
- Capital from 2 or more shareholders;
- Relevant guanxi with the local society
- Sharing costs and risks
- Long decision making process;
- Sharing technology and know-how (IP risk)
- Cultural difference (even on high level management level)
What about running an on-line shop?
E-commerce is a growing sector that offers many possibilities for European companies. Nevertheless, it is a new market that needs to be carefully studied according to the targets, aims, and purposes that a company intends to achieve.
To set up an on-line shop it is still necessary to create a WFOE or, if the company is already operating in China, some amendments will probably be necessary.
Referring to this particular investment it is fundamental to hire a company that specializes in setting up this kind of business.
Have a look at the presentation of P&P (Shanghai) Business Consultancy Co., Ltd. :
Dennis, A. Leventhal, How to Leap a Great Wall in China, Merwin Asia - June 2014
Kerry Brown, China and the EU in Context: Insights for Business and Investors – May 2014r
- More details about JV: http://www.pathtochina.com/reg_jv.htm
- China's New Company Registration and Administration Regime Company Law (2015): http://www.pndp.net/chinas-new-company-registration-and-administration-regime/
- La Cina Emana il nuovo catalogo per gli investimenti stranieri: http://www.gop.it/doc_pubblicazioni/461_3g3prnh3na_ita.pdf
- Doing Business in China: http://www.bakermckenzie.com/files/Uploads/Documents/China%20Update%202012/bk_china_doingbusinessguide_jan10.pdf
- General information about set up a business in China: http://export.gov/china/build/groups/public/@eg_cn/documents/webcontent/eg_cn_055956.pdf