How To Do Business in China: Breaking Down the 6 Main Approaches
April 11, 2023
How To Do Business in China

How To Do Business in China

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China has long established itself as a crucial region for many businesses’ global operations. Despite having been heavily restricted from the rest of the world during the early 2020s, businesses are still optimistic about the Chinese market and the opportunities available. With cost-effective manufacturing, home to the largest consumer market, favorable governmental policies and modern infrastructure, more and more companies are entering the landscape. Here we explore 6 different ways how you can do business in China.

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Setting Up an Entity

If a business is looking to establish a standalone presence in China, setting up a legal business entity within the country is a common approach. There are a couple of ways to do this, including as a “Wholly Foreign Owned Entity,” or as a Joint Venture. Both of these routes result in a Limited Liability Corporation (LLC), but there are a few key differences between the two.

A WFOE is one of the most common ways for foreign businesses to enter the Chinese market. It provides total autonomy to the business owners, allowing them to make decisions on their own about how to run their business in the new market. A WFOE is generally split into three categories: a Standard/Consulting WFOE, a Trading WFOE, or a Manufacturing WFOE. Depending on whether the business is a goods or services business is largely what will impact its subcategory.

Very similar operationally to a WFOE, a Joint Venture requires the foreign business owner to partner with a Chinese company and work together to navigate the Chinese market. This is a great option for businesses that operate in restricted sectors. Some sectors require foreign businesses to work with a Chinese partner when entering the country. Even if a business entity is not trying to operate in a restricted sector, working with a Chinese partner that understands the market conditions and consumer behavior can be incredibly valuable.

Lastly, it is also possible to establish a Representative Office (RO) in China. However, an RO is not a separate legal entity, but an extension of the head office. Whereas the RO does not have any registered capital requirements, the activities that can be performed are limited to only conducted marketing & research activities for the headquarters. As such, the Representative Office is no longer a popular option for foreign companies to enter the market.

The approach of entering the Chinese market by setting up an entity is the method with the highest degree of commitment to the market, as you will be required to go through the establishment and approval procedures with the authorities. Nevertheless, upon establishment you will be able to fully reap all the benefits that a local presence in the market brings. When you decide to set up your own entity in China, it is essential to plan your entry strategy well.

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E-commerce

With the world’s largest eCommerce market, China provides many opportunities for businesses that are looking to sell products online. Since it’s not necessary to set up a legal entity to run an international eCommerce site in China, this approach is more cost-effective and requires entrepreneurs to jump through fewer hoops to get started. However, you should have a legal entity set up in a different country to prove to Chinese authorities that your business is established. If you’re looking to sell products on a Chinese eCommerce platform, a legal entity within China will be required.

Getting started on a new, unfamiliar eCommerce platform can be challenging; you might need to work with the platform itself or a dedicated eCommerce partner to list your products correctly and ensure you have the right infrastructure in place to sell and distribute your products through the platform. You will also need to convert all your marketing and label materials to Chinese, so if you don’t have someone within your company that can write Chinese, you will need to outsource that work to a qualified professional.

Distribution Approach

For low upfront costs, working with a Chinese distributor is a great option for foreign businesses looking to enter China’s booming market. Distributors often take care of importing, storage, shipping, sales, and sometimes even marketing. Since they often have a wide network within the country, they can help your business make connections with retail stores and local customers, opening sales avenues.

Because of competition within the Chinese markets, distributors offer preferential treatment to businesses that have already established brand awareness in China, making it hard for new brands to break into the market this way. If your products end up not doing well in China, distributors will be quick to drop their partnership and start working with a different brand instead.

Avoiding the need to establish a legal entity can be beneficial, as it allows you to start selling your products immediately. As mentioned above, you should start marketing within China prior to selling your products through a distributor to help mitigate the chances of low sales and a strained distribution relationship. Furthermore, it is advised to be careful with the terms and conditions of your agreement, particularly related to the (exclusive) rights to sell your products.

Sourcing

China is one of the world’s manufacturing powerhouses, so it’s a great place to source products from. Not only are high-quality and efficiently made products easy to find in China, but they usually come at lower price points than similar products sourced from other countries. As your business grows and needs to scale manufacturing, the infrastructure in China is perfectly equipped to scale and grow with you. This reduces the chances that you’ll need to find a new supplier as your business evolves.

To ensure the products that you source from China meet your quality standards, work with a reputable manufacturer and don’t be afraid to reject sourcing partnerships if the product quality is in question. We also recommend that you go visit the supplier in person. This way, you can see directly how things operate and even touch product mock-ups before you enter a contractual agreement. Alternatively, you can appoint an experienced quality control partner to visit the supplier on your behalf, avoiding the need to travel to China.

Once the goods are created, either the manufacturer or a Chinese exporting partner that is licensed to export products will help move the products from the warehouse in China to wherever you’re trying to sell them. Though this method won’t actually help you break into the Chinese market and sell your products to Chinese consumers, it can create a strong foundation of contacts when you’re ready to do so.

Direct Exporting

Exporting goods from your home country directly to clients in China is possible, but it must be done through a company that is licensed to import/export products in accordance with Chinese laws, or your client will need to import the product themselves. If you have products that are in a unique niche and bought in smaller quantities, rendering full-scale distribution unnecessary, direct exporting could be the right avenue for your business.

This process will help you understand the Chinese market on a deeper level than working with an established distributor, but it can be challenging to navigate the market without an expert on your team.

Selling Professional Services 

For businesses that offer services, such as product installation and repairs, selling these services in China can be done without a legal entity. Even for non-good transactions, the Chinese Value-Added Tax (VAT) must be paid, forcing both parties to agree on who will bear the burden of these taxes and fees. If the client pays the VAT, the service provider then receives 100% of the service charges, but if the provider pays the VAT, they would only receive their fee minus the VAT and other taxes.

In some circumstances, the withheld taxes can be reduced or even removed. For instance, if the service is performed outside of China, then the VAT has the potential to be removed, with the government’s approval. Selling services is much different to navigate than selling goods, but with the rise in service-offering businesses, it is becoming more commonplace.

Don’t Let Complexities Close Off the Market

There is no denying that the Chinese market is full of opportunities for businesses in all sectors however, due to the complexities of entering many businesses do not take the steps necessary to successfully enter the market.

Our 10-step plan has helped companies successfully enter the market for more than a decade. Get in touch with us and let one of our China experts explain exactly how it works!

Disclaimer: all articles and its related content are the property of MSA Consulting Company Limited and may not be reproduced either in part or in full without prior consent.
How To Do Business in China

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