10 Steps to Starting a Business in China
Lou Hoffman, CEO of the public relations firm The Hoffman Agency, wanted to place a recruitment ad in a Chinese paper for his new office in Beijing.
Back home in San Jose, California, he would have simply faxed it to the local paper.
In Beijing, he had to get the ad approved by four different government agencies - in person.
"It's a huge city, and there are traffic jams 9-5," he recalls. "We drove to the first agency, and they approved it. We drove to the next agency and they approved it. We drove to the third agency and they said, 'You'll need to tweak this.' So we needed to go back to the first agency because what they approved wasn't right anymore."
Getting one classified ad approved took Hoffman about 18 hours total.
"In the big scheme of things, it's not the end of the world," he says, "but it was a symbol that I was in a different world and how they get things done is completely different."
It's a realization all foreign business owners entering the Chinese market have to face, and while it may be frustrating to forgo all your Western sensibilities, experts say it's worth it to stake your claim in this growing consumer market.
"Today's story is all about the new Chinese consumer. There's been a huge growth in disposable income, and the Chinese are ready to spend," says Robert Collins, co-author of Doing Business in China for Dummies.
"Europe's mired in mud. The U.S. economy's flat. So where's the action? It's in China," Collins says. "If you want to play, you've got to be here."
We've mapped out the 10 steps you'll need to take to get there, and it involves a lot more than getting a visa.
1. Do your homework.
Lucky you. You're not the first United States citizen to break into the Chinese market, so you don't have to learn the tough lessons the hard way (well, not all of them at least).
"There's no reason to be reinventing the wheel on things people have done before that could be avoided," says John Frisbie, president of the U.S.-China Business Council, based in Washington, D.C.
Talk to people who have opened offices in China. Ask them how they succeeded and especially how they failed. It's not just the Americans you need to talk to, either. Frisbie says you should travel to China and start networking at local trade shows, as relationships are crucial to doing business in the country. A calendar of trade shows is available here.
Make sure you're informed about the state of the industry you're in. A lot of this research can take place from your own home. Check out the five-year plan that the Chinese government publishes, which details what types of businesses they're looking for.
Dan Harris, a Seattle-based blogger and founding member of international business law firm Harris & Moure, says, "China wants high-tech. China does not want pollution. They want businesses that will give a lot of people good jobs, and they want to encourage development inland."
Because China's government is so tightly affiliated with its businesses, knowing what the government wants will help you draft your business plan later on.
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2. Pick a location.
At this point, you have an entire country at your disposal, but you can't set your business down just anywhere and expect to be a success.
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 the big cities. If you're a tech company, for instance, Beijing may be the place for you. Find out where the action is happening in your industry.
The major business centers aren't your only options, either. Some companies find moving inland to be the better bet. Ken Wong, president of the holding company Covenant Group of China suggests asking yourself the following questions, especially if you're selling goods rather than services, to determine how near to or far from the coast you need to be:
- What are your transportation needs?
- What are your logistical needs?
- Are you relying on goods that may be imported to China?
- How can you get the goods from the port to your location?
- What government inspections and restrictions will you be subject to?
Once you've settled on a region, you have to find an office, since you'll need proof of a lease to register your business.
"You have to get an office rent agreement and you can use that as your office address," says Thomas Yang, a Philadelphia-based legal consultant with Stevens & Lee, and former judge and corporate lawyer from China. The agreement essentially promises you the space on the condition your business gets approved.
Find office space through a realtor, just as you would back home. Whatever space you choose, though, make sure it is zoned for the type of business you're planning on opening.
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3. Choose an entity status
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. Each, of course, has its pros and cons.
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.
"They fail nine out of 10 times. You're working with someone who's familiar with the territory on their turf, and they will end up with the business," Harris says.
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. As Yang says, "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, therefore, is a wholly foreign owned enterprise, known as a WFOE. According to Frisbie, "75 percent of American investment in China these days is 100 percent American-owned facilities," because it gives business owners maximum quality control.
Not surprisingly, though, a WFOE is much more 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. Harris says. And, he notes: "That amount can vary greatly depending on the nature of your business and where you're setting it up."
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4. Develop a business plan.
A detailed five-year business plan is crucial, because once the government approves it, you will be able to operate only within its guidelines. If you start offering a product or service that is not in your business plan, the Chinese government can shut your business down. The same goes for where and how you operate.
"Make sure your business plan is as broad as possible to allow the company to operate freely," says Collins. "U.S. companies expect to operate in a certain way here and they realize their business license may not allow them to do that."
While it needs to be broad, it should also be specific. Make sure you include your location, projected revenues, product or service description, expected number of employees and budget requirements in the plan.
It's also wise to tailor your plan to China's five-year plan.
"If you're making a high-tech piece of lawn equipment, and you just apply saying, 'I'm going to be making lawn equipment,' they're not going to look at you very favorably," says Harris. "But if you say I have this new, software-driven, high-tech piece of lawn equipment that's going to put 20 software engineers in China to work right away, then it's a different project."
To get that message across, of course, you'll need the right representative.
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5. Find a liaison … or several.
No matter how informed you are, you won't get very far without consulting a representative to register your business. According to Collins, 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.
Wong also suggests getting in touch 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.
Harris says to beware of local Chinese business agents that charge $800 for a bad English translation of the business application. "Your chances of getting your company registered with that are zero," he says. Perform thorough background checks or talk to other American business owners to find out who they used to register.
"We used Baker & McKenzie, and they are expensive, but you get what you pay for," says Hoffman. "They did a fantastic job."
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. Harris says, "You need somebody who has negotiated that territory a number of times before and you absolutely have to have people who speak Chinese to go meet with the local officials."
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6. Organize the necessary documents.
"There's the written laws in China and then there's the reality on the ground," says Harris. Nowhere does this theory apply more than when it comes to what documents you'll need to register.
Though the documents you'll need to register for a WFOE will vary from place to place, you can find an extensive list of what you might need, here.
Always prepare for a wildcard, though. "We've had local authorities say they want to see exactly what it will be we're manufacturing, so we bring it in," Harris says. "We just did one, and they required we write a legal opinion explaining how LLCs worked in the United States. We'd never had that before, but when it happens, don't fight with them, because you'll lose, and you'll waste time."
Application forms may also differ depending on who you're dealing with, so Harris says it's usually best to get it directly from the local authority.
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7. Trademark your intellectual property.
Intellectual property violations are a big issue for foreign investors in China. Many U.S. manufacturers believe that because they have a trademark at home, it will hold up in China, but that's not the case. 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.
"Somebody could go register what you thought was your trademark," Harris says. "Then, when you're about to ship $3 million worth of product, and your product's held up at the port, you get a phone call from someone saying, 'You're using my trademark, and I'd like to sell it to you for $300,000 a year.' If you don't pay them for the trademark, your goods will never leave China."
You can find the trademark application here.
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8. Find a bank.
This part should be quick and easy, since there are plenty of banks with a huge presence in China. Try HSBC, which is based in Hong Kong, or Bank of America, which you can find all over the country.
"If you're dealing with a bank that doesn't have any relationship with banks in the United States, it makes it tough to keep track of your money," says Wong. "You want to make sure you have a bank in the United States and a bank in China that has some sort of corresponding relationship, so your banking is more transparent."
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9. Hire a staff.
Hiring 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 they'll be able to run the business properly.
"If all things are equal," Frisbie says, "the language skills can be greatly beneficial, but it's far more important to have a smart business person in that role who's going to run the company the way you want it run."
In Hoffman's case, he tracked down a Chinese public relations professional and asked that she come out to the company's headquarters in Silicon Valley to learn the ropes for several months. She then returned to China with all the company's values and practices in mind and started the business.
"I think that really served us well," he remembers.
There are other options, of course. Try reaching out to human resources consultants and headhunting agencies in China, and don't disregard American-born Chinese or Chinese citizens who were schooled in America, either.
"Seriously consider using talent that's had some overseas experience that have been able to bridge the U.S. community and the Chinese business world," Collins recommends.
Good talent doesn't come cheap, according to the experts, so if you want the best, you have to be willing to pay them what they're worth.
"If you go to China expecting a deal, you'll be sorely disappointed," Hoffman says.
Once you have trusted managers in place, they should be able to assist you in hiring the rest of the staff. Remember, though, you need to have a contract for every employee you hire, as well as an employee manual. Without either, says Harris, "it may become nearly impossible for you to fire anyone."
"In China, you need a reason to fire someone," he explains. "That reason needs to be set down in your employee manual, otherwise your ex-employees can sue you for a lot of wages."
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10. Take it slow.
Now that you're all set up, you have to manage expectations. If Hoffman's story about the recruiting ad proves anything, it's that things can move slowly in this fast-growing country.
"If you don't leave your Western lens behind, it can be frustrating," Hoffman says.
Don't jump into quick business deals just to turn a profit. It takes time to build business relationships over there. "It's much different than the U.S. in regards to the amount of time that's spent developing the business relationship before the actual deal is consummated," says Wong.
What will win you success in the Chinese market is patience. "The Chinese have been doing business in a certain manner for thousands of years. Don't even start to think for a millisecond that you're going to change it."
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