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Must-Knows about Business Set-up in China

September 16, 2010 Leave a comment

More and more Australian companies are setting up their own presence in China in order to source products/services directly from China or enter the Chinese market. However, given the alien nature of local regulations and business environment in China, it is critical to be proactive and fully prepared before you take the strategic move to set up your own presence in China.

Here are some “must-knows” before you set up the business in China:

1.You have more than one option for a local presence in China. Your China presence may be in the form of a wholly owned foreign enterprise, a contractual joint venture, an equity joint venture, a representative office or a local representation by a third party (local secretary/representation service companies).

2.Carefully define your business scope for the China presence. China National Development and Reform Commission may prohibit, restrict, permit or encourage your business set-up based on your business categorization and scope. Hence it is critical to carefully define your business scope so as to be permitted or encouraged to set up the presence.

3.Select the right location for your China operation. China abandoned its preferential tax rate for investments of foreign companies from January 1st 2008. However, some areas still offer local preferential policies for foreign investors in terms of land leasing/procurement, staff recruitment and management, local tax etc.

4.Confirm the minimum registered capital for your China operation. The Chinese government requires certain minimum registered capital for various types of businesses. However, local Industry and Commerce Administrations may decide on your minimum registered capital based on their judgement of your business scope and operation scale. You need to confirm with local government agencies the minimum registered capital through local contacts before taking any other actions in case they require an amount far above your financial resources available for the China operation.

5.Integrate commercial clauses in the Articles of Association to maximise profit repatriation into Australia. You may have commercial arrangements between your Head Office in Australia and the subsidiary in China in order to guarantee maximum profit repatriation. However, some arrangements must be included as part of the Articles of Association to be valid. The Articles of Association is to be submitted to local government agencies for approval and filing during business license registration. Hence, you must incorporate necessary clauses in the Articles of Association in the first instance.

6.Fully understand employers’ responsibilities and liabilities in China. China issued the new Law of Labour in 2007 which specified issues on employment contract, redundancy, etc. Without preliminary knowledge of this law, you may end up spending a huge amount of time and money terminating the contract with under performing employees, as the structure of the contract was wrong. You also need to be aware of the mandatory employee welfare and benefits so as to include such cost in the budget.

7.Conduct thorough due diligence and credit check on your joint venture partners. Your partners may not be what they claim to be. China has the business culture to show their wealth and status by driving luxurious cars, wearing prestigious watches and owning an impressive factory. Hence your Chinese business partners may look financially viable and well connected but, as a matter of fact, live on bank loans and personal debts.

8.Develop a comprehensive local employee management system. It is a hard job to recruit the right staff in a foreign country. It is even harder to effectively manage the local staff in a foreign country. A sound and robust employee management system will encourage the engagement and commitment of local staff and avoid potential risks. You may include reporting and communication policies, staff training, performance assessment, remuneration, career management and employee management manual in the system.

Business set-up in China is a big project by itself, which requires financial and time commitments, business management knowledge and China expertise. Identifying a competent agent to manage the complex process will be a cost and time effective way to avoid potential pitfalls.

Acquire A Business in China?

September 16, 2010 Leave a comment

China is not just the World Factory, most booming market for resources and consumer goods and the fastest growing economy in the world with an average GDP of over 10% in the past decade, it is also an attractive destination for foreign investment since China opened its door to foreign businesses in 1978.

With China’s access to WTO in 2000, less restriction on foreign investment, new infrastructure, supply of abundant quality and cheap labour, there are good opportunities to invest in a quality business or acquire businesses in China.

Acquiring or investing in an existing business is a way to quickly establish your own presence in China and leverage its facilities, resources and networks to access the Chinese market or conduct low-cost manufacturing in China and then export to the global market. With the global financial crisis, China presents a great opportunity for Australian companies to acquire export-oriented manufacturers especially in East China and South China. However, it is usually a complicated and exhausting process.
Here are some Must- knows you need to be aware of before take your first move to acquire or invest in a business in China:

  • Take a strategic approach to acquire or invest in a business in China. Review your internal resources, corporate strategy and business strategy, and identify needs and gaps so as to better assess the option to acquire or invest in a business in China. You may start by reflecting such questions: what is the ultimate goal to do so? How does this acquisition/investment serve my long term business strategy? Is there any alternative? What resources can I allocate to this acquisition and investment? What attributes do I need from the acquisition target.
  • When search for acquisition or investment target, bear in mind you are looking for the best fit rather than the cheapest or biggest. How does the target fit in your overall business strategy and China strategy? Do you have a criteria list of must-have and ideal attributes of acquisition/investment target?
  • Do your research and search carefully among a large pool of acquisition/investment targets. When foreign companies enter China, they are often amazed by the “low price” they are paying to acquire a business without much comparison with other potential targets.
  • Conduct comprehensive due diligence on your acquisition/investment target. The due diligence is much more than just financial auditing. You need to fully understand the target from tip to toe: industry reputation, business scope restricted in their business licence and industry licence, ownership of their venue and facilities, financial aspects, manufacturing capabilities, current ownership and corporate structure, marketing and sales capabilities, corporate culture, team, relationship with local government, supplier and client references, patents and trademarks, legal issues, default history, market scandals and brand crisis, etc. You may leverage a consulting firm to assist.
  • Have a competent Chinese negotiator in your acquisition team who can understand all the cultural nuances and negotiation tricks of your Chinese target. Bear in mind: not any Chinese can do this job as not any Australian can negotiate a good deal in Australia. Find competent and experienced ones.
  • Understand compliance and governance issues and smartly structure the deal and the organization. China restricts foreign investment in some industry sectors in term of maximum percentage of shareholding, especially financial sector, media and some critical resources sectors. Also these is restriction on the number of directors and normal practice on the appointment of Chairman and Managing Director.
  • Do not under-estimate the complexity of the bureaucratic procedures and timeframe. As a foreign investor, you may have full proof of your qualification and financial capabilities and then go through Chinese government agencies to get all documents chopped. It will be more cost effective and efficient to appoint an experienced agent who knows where to knock at the door and get things done in China.
  • Develop a profit repatriation mechanism and an exit strategy. You invest in China not to lock your money in China and be there forever. Think about the end from the very beginning. As Chinese saying says “ without thinking on a long term basis, you will always have immediate trouble”.
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