Doing Business In China

By Louis Martel CA

It is relatively easy for a manufacturer to successfully do business in China. It requires good preparation, a great deal of patience and knowledge of the country's traditions.There are three ways to go about it:

(1)By importing raw materials or final products

(2)By creating business relations with a Chinese partner. The partnership can be established through a joint venture, authorized by Chinese law, or through a contractor.

(3)By starting one's own company that can operate in a free zone, or not.

There are advantages and disadvantages for all of these methods.

What You Need To Know

China is a vast country. The Chinese do not do business like North Americans. They like negotiating and are very patient. In every day life as in business, the Chinese act on behalf of the public interest and are willing to share their knowledge as well as their clients. North Americans have a different vision.. They act in the name of personal gain and keep their clients and production procedures to themselves.. You would be shocked to see how easily how one can visit a Chinese competitor plant and how its owners will talk to you of their top clients.. In many cases, if a company is unable to produce your order on time, it will offer you the option of having a competitor manufacture it for you.

Negotiating a contract is a long procedure.. Depending on the type of contract, it can take from two to twelve months to complete.. The Chinese are patient people.. It is important to take the time to listen to them.. Furthermore, in accordance with the planning system, there are procedures for every action. This way, if you want to start a company in China to manufacture your products, you must follow this order:

(1) Sign a lease or a lease agreement

(2) Start a company

(3)Obtain a production license

(4) Negotiate your agreements with a financial institution-bank, including the opening of an account.

Despite the inconveniences this order of things can cause, it is difficult to change it.

For a North American, a contract is synonymous to closing a deal that both parties are bound to follow, barring contrary agreements.As a bank manager once told me, for the Chinese, a contract is the foundation of never-ending negotiations.Our Chinese peers enjoy settling their differences around good food at the end of the day.

The Chinese like to bend the rules and will try to do so at every occasion, on the road as in business.. If they get caught, they consider themselves unlucky, only to redo it the next chance that they get.. It is important to always be on guard and to check on what they are doing.

China is structured differently from Canada.One must always have his eyes open, and never take anything for granted.. Doing business in China is different than in North America.. Obtaining an importation licence for your production material can be very long and costly.. You must plan ahead. Although the labour force is abundant and qualified, it is mobile; you will not be able to keep it for a long time without remuneration and temporary layoffs are rare.. And paying them to sit idle generates losses.

In the beginning, you might find doing business in China costly, but in the long run the savings will be substantial, particularly if you manufacture the products yourself. Manufacturers are usually grouped in one area and are funded by the municipal and provincial authorities. In your search for a supplier, it is more than likely that you will find many more of them in the same region.. Often, there are areas specialized in the industrial sector and it is therefore to the businessman's advantage to settle himself in one of these existing areas and in doing so benefiting from the infrastructure.

The three most common ways of doing business are the following:

Import

Often, it is the best way to start but also the most expensive. Many companies believe they are saving by purchasing raw material but the true savings lie in the product manufacturing as much as in the management of the company.. A bookkeeper's salary in North America is equivalent to the business' organization structure in China.

Beware of trade shows and of Chinese who speak English.. They are generally agents with margins lying between 20% and 100%. Chinese products are so cheap that it might appear as though you are getting a good deal, where as a more thorough search will generate better deals.

Importing is an interesting option for small volume orders.. Simple products to manufacture such as catalogues and publicity brochures can turn out to be a bargain.. One must never place an order at the last minute.. Different unforeseen events can arise and if the correspondent realises that you are in a rush, chances are that there will be a considerable increase in the prices, reaching 20%.

One must never make a drop shipment.. Your correspondent will get in contact with your client through one of his competitors or peers in an attempt to steal him from you.. There are methods to get around the problem.. If the import of your products requires you to transfer your know how, be very careful, there is a risk that it will happen.

Association

Chinese law foresees different types of associations, the joint venture being the most popular one.. This form of association usually attracts businessmen who are just getting started in the field.

It is not recommended that you establish an association if the transfer of your know how is important to you or if you consider that a client list is vital to the proper functioning of your business.. Your associate will share this information that you wish to keep confidential with his peers and competitors.

According to bankers, these relationships are usually of short term because the Chinese and North American business mentalities are too different.. Furthermore, your Chinese associate will always expect you to discuss the operations and you will only be able to visit China when needed.

This method is advantageous because you can benefit from your Chinese associate's knowledge, his contacts and you will learn how to operate a business in China.. Your products will definitely be cheaper and you will find yourself a step ahead from your competitors.

The inconveniences of this method are the lengthy negotiations, the risks you are running of being tricked, the cultural differences between China and North America that show through in the different ways both cultures run their businesses and the high costs for follow-ups.

Company Ownership

This method will allow you to save substantially on the products' costs as well as on the company's management.. Furthermore, if a company exports 70% of its production or more, the tax rate is significantly reduced.

If well structured, your company in China should include North American managing methods.. This will allow you to protect the confidentially of your know-how as well as your client list.. Because of the outrageous fixed costs in North America, you will see yourself quickly relocate most of your management in China .

Those who want to establish themselves in China have two options: locating their company in a free zone (EPZ), or outside of an EPZ zone. . This zone is accessible only to those who export 70% of their production or more, and it facilitates the import of raw materials for a number of product components.. From the areas outside the EPZ zone, importing components for the manufacturing of products can be a long and tedious process lasting between three to six months.. An import licence, a deposit and a follow up of the usage of imported products will be requested.. Furthermore, importing components from the EPZ zones is Value Added Tax free.

Starting a company is an interesting option if your product and its components and/or raw materials run on a labor intensive production.. An unqualified worker receives a salary of $0.62 US per hour.. The rent for a building is reasonable and you can even negotiate a package deal.

The Chinese are good workers and hearty people.. Nevertheless, they do not have our managing knowledge.. Furthermore, the labour force is mobile.. It is vital for the quality of the products to make good management manuals and to have good procedures.. Routines must be well defined and the follow-ups well done.. This will allow you to quickly replace a new employee.

Company ownership does have some inconveniences.. The financing and the capital management are different.. The term designated capital defines the portion of the investment the state freezes during the operations.. Seventy percent of the investment, including the capital, inter-company loans, long term loans, short term and long term bank loans, all must be deposited in capital form during the two or three first years.. The capital can be regained upon the closing of the operations or upon the dissolution of the company.. Therefore, the inventory financing can be done through a banker's acceptance, issued to the supplier.. This can last for up to 180 days and reduce bank loans and the designated capital needed.. The company's profit can be paid to foreign shareholders without holdback at the source, except for a 10% holdback for the future expansion of the company, and a 2% to 4% intended for the workers' union.. The ten percent holdback will be paid-up upon the liquidation of the company.

One of the major inconveniences to the company ownership is having to hire a general manager from North America for a company with less than one hundred employees, and an extra manager for more than one hundred employees.. Recruiting an individual willing to work overseas for a period of six months or more is a problem for a company relocating its operations to China.. These managers are quite costly and usually quit a few months into the contract.. The ideal solution is to organize a rotation of all the North American managers, avoiding desertion.

For the North American businessman who likes to have a grip on his company, the operation software of the Chinese company must be accessible from all around the globe. This will allow the staff back home to keep up with the operations. . You must not forget that the work methods and the staff's efficiency is at a lower level than in America , therefore creating the need for a close follow-up.

Keep in mind the company's location and the existing amenities in the area such as the hotels, restaurants and transportation for the employees.. Remember that the transport is expensive in China.

The main advantage of the ownership option is the overall cost of you products.. Your company will become more competitive and will therefore be able to face the global demand.

Conclusion

APS Sourcing and Yangtse is a company working with manufacturing companies interested to do business in Asia, and more precisely, in China.. Our specialized staff will follow you in your every step to turn your projects into a successful business.. We can help you manage your Chinese company, thanks to our managing software, and help you keep control of it from a distance.