Doing business in China? 7 things to consider first

Co-published by Brainsfeed and TCP Growth

Many have attempted to cross the great wall for business, only few have succeeded. The cultural and legal differences are substantial, but proper preparation can reduce the difficulty of bridging those gaps. The considerations below will give you a head start.

1.Choose the Right Partner

When making sure you’re choosing the right partner for your business in China, you have to decide what role you are looking for them to play. Some people look for an agent who can help with the bureaucracy that one has to navigate when entering the Chinese market. An agent will help you with the paperwork, the registration, and the general dealing with the authorities on the ground. An expert tip for finding an agent is attending trade fairs for the market you’re trying to enter, perhaps even taking out a booth to maximize your chances of success. Another type of partner you might be looking for is a distributor, someone who can help get your product or services to the clients. A distributor will take on some of your risk by buying directly from you, allowing you to pass on some of the responsibility of finding customers. You could also be looking for someone to help you form a joint venture, which can help speed up sometimes lengthy bureaucracy and also give you access to local networks and local expertise.

Once you have chosen the kind of partner you are looking to work with, choosing the right individual or group for your Chinese Venture is the next vital step. Background checks are essential. It is worth taking the time to properly vet any potential partners and make sure that they are trustworthy and are licensed to operate in the field you plan to enter. Conduct a thorough review of a potential partner's business history. Go through all the information you can find such as speeches, testimony from customers, press releases, news stories, testimonies from former employees, basically anything you can find that will help you paint a picture of the person you are going to be working with.

When you have met a good match in a business partner, experts in the field believe you should take the time to build a good relationship. This sounds intuitive, but people need to remember that China has a very different business culture to the US or the UK. Chinese businesspeople often want to build relationships with potential foreign partners, but this can take longer than expected and require a high-frequency of contact. There are small things you can do to help foster these growing relationships such as using Skype or video calling over regular telephone calls. Another thing is to have the most senior person at your company meet with them, and if that is not possible, you can give the person with the most knowledge and know-how for the situation the top job title. Taking the time to build a strong relationship while respecting the local customs is a way to cement a necessary level of trust with your potential new partner. In short, finding a reliable and trusted business partner requires a balance between research and background checks and face to face or over Skype relationship building. You cannot solely rely on one or the other.

2. Business Viability

It is important to be aware of how large, and how diverse China is. There is little point scoping out the competition in Beijing if your business is going to set up in a city hundreds or thousands of miles away. Some experts see China as more of a continent than a country and because of this, different geographical locations come with specific circumstances. This is something of great importance to be aware of while you undertake your research into the market, your competitors, prices, and your competitive edge in China.

3. Legal Viability

Chinese business law recognizes two types of companies, Legal Liability Company (LLC) and Joint Stock Limited Company (JSLC). An LLC is the more common type of company found in China and the type chosen most often by foreign nationals. Setting up an LLC in China offers the business owner protections in the form of shareholder liability, meaning personal assets are safe from losses incurred by the company, while also allowing the company legal protection of assets which includes intellectual property, something that is further protected by China’s New Foreign Investment Law.

All foreign-invested enterprises (FIEs) in China require a business license to operate and are governed by China’s New Foreign Investment Law (FIL) which came into effect on January 1st, 2020. The business licenses handed out by the Chinese authorities only permit FIEs to operate in a specific line of business. They usually set narrow parameters as FIEs are very rarely able to operate a company that spans over more than one industry. For example, if you set up a company that specializes in manufacturing, it would be difficult to also operate in the real estate market. Furthermore, there is a negative list of potential markets that FIEs are either totally banned from entering, such as broadcasting, in which investing is highly restricted. To gain access to a sector on the negative list, an FIE would need to set up a joint venture (JV) with a Chinese party. This kind of JV is an LLC between the foreign and local parties in which the foreign investors own 25% or more share of the business. A business set up in an industry outside of the negative list becomes a Wholly Foreign-Owned Enterprise (WFOE), which is also an LLC.

When it comes to registering a company and setting up in China, consulting the most up to date version of the negative list is a very important first step. This tells you of the legal viability of your business and the likelihood your company would be approved. It also begins to inform you of what kind of structure your company will be able to take. If your area of interest is on the negative list you will have to become a JV with a local party to legally be able to operate, that is if your area of interest is restricted not outright banned. If your field is open to FIEs then you can start to look at the business laws of the countries to find out the implications for getting started, the costs, timeframes, and requirements.

4. Protect your IP

As I briefly touched on earlier, becoming an LLC in China gives you some protection for your intellectual property. The first thing you should do is to register your IP in China as your IP from your home nation will not be recognized. If you plan on selling or manufacturing in China, you need to register a trademark. In China, the first to register a ™ is recognised, rather than the first to use. Tesla and Groupon are examples of companies who have lost out to this system and had their name already taken on arrival. With patents, you must file your application in Chinese and apply before any public disclosure of what it is you are patenting. It is possible to backdate your application, but for safety purposes, it is easier to make sure you complete these stages early. First of all, the quicker you are to register the less likely it will be that you will have to purchase the trademark from somebody who has already registered it. If someone else legally owns your trademark, they are able to stop your products at customs as you try to export as your product would be in violation of their intellectual property. If you own the trademark, then you have the same power to stop others trying to steal your brand. So, once you do own that trademark, make sure you register it with customs officials and protect yourself from counterfeit exports in your name. Another protection you have once you have registered your IP is internet takedowns. Most Chinese websites have services that help you remove counterfeit and fraudulent versions of your IP; you will just need to provide evidence of your registration and information on the product you want to be taken down.

The best advice about protecting your IP in China is to be vigilant. You can keep an eye on the China Trademark Office as it publishes applications on a regular basis. You can also hire a brand monitoring service that will highlight examples of infringements that happen online. This can be effective and also help you save time as they take this task out of your hands and can often assist in the process of getting fraudulent products removed. Finally, if you are setting up a Joint Venture in China, you should be wary of the implications that could possibly have for your IP. While a JV has its perks, it can also leave your IP vulnerable if the relationship with your shareholders and business partners deteriorates. If it is a JV you are looking to set up in China, legal experts suggest that some of the vital parts of your IP should not be transferred to China, rather they should be kept with the foreign parent company to avoid the risks of having it stolen.

5. Use Good Contracts

Like all of the subjects discussed so far, you need to familiarise yourself with the local way of doing things. A good place to start when drafting your contracts is finding a bilingual partner who can help you with the process. It is not mandatory for contracts in China to be written in the local language, but it is a good idea to do so. This is because if there are any disputes over the contract, it would prove very difficult to resolve any disagreements in your favour when the contract you have is in a foreign language. Furthermore, some contracts have to be approved by, or filed with the authorities and this process is a lot simpler if the contract is written in the local language. It seems obvious, but you want your contracts to follow Chinese law - China very rarely will enforce a judgment made in a foreign court, so you will need any dispute you have to be sorted out within the Chinese system.

There are more steps you can take to protect yourself and your business. One of these steps is to add in an agreement for damages in case of a breach of contract. This way you have a legal document to take with you to any court if necessary, that will back up your claim. You should be very clear and careful when drawing up the damages. Make sure it is based in science and reality, because if it is just in there to serve as a penalty, the likelihood is that it will not be held up by the Chinese courts. Another protective measure is that contracts should be stamped with the seal of the Chinese company you are doing business with. Make sure the seals are in Chinese and correspond exactly with the company's details.

Further contractual safety can be found in confidentiality agreements. If you want greater protection for your IP, then getting any manufacturers working on your supply chain to sign a confidentiality agreement will give you legal recourse should you find them in breach of that agreement by copying your designs and your product. Experts say that local producers are more than often very happy to sign a confidentiality agreement so if you are worried about your IP, it is worth having one in place for your own peace of mind.

6. Understanding the Country’s Initiatives

One initiative that anyone looking to set up a business in China should be paying attention to is their ‘encouraged industries’. It was mentioned earlier in this chapter that China has a negative list which contains industries that foreign companies are either forbidden from investing in or their involvement in is highly restricted. There is also a list of industries where foreign investment is encouraged and for any business that operates in these areas, this could prove to be a potentially lucrative opportunity. Some of the industries included in the encouraged list are green technology, modern agriculture, high-tech, and advanced manufacturing. If you find out that the industry that your business plans to operate within in China is on the encouraged list, your business could potentially be given perks from the Chinese state. These perks include tax breaks, discounted land and fast-tracking through the approval procedures. Being aware of and understanding initiative could help your business thrive in China, especially if you specialize in tech and green technologies.

7. Identify the Values you Will Bring into China and Vice Versa

China has been described as a hierarchical society with a strict set of social norms. This means that when you do business in China as a foreigner, it is highly likely that those you’re going to be dealing with partners who have a different set of values to your own. You should familiarise yourself with the local business customs as it will make your Chinese counterparts happy and build good relationships. Some of these values you will be able to take away and make them part of your own business ethos, just like your values could rub off on your Chinese partners. Like any meaningful relationship, learn from each other. In China, you will be introduced to ways of thinking and new values in business, these can be learned and brought into your own way of operating and may bring you great success.

Excerpt from Market Entry 10x Series (2020), co-published by Brainsfeed and TCP Growth

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