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(Last updated: 03 Jan 2008)
In considering establishing a long-term presence in China, companies should thoroughly investigate each of the different market entry models prior to entering the market. You need to be mindful of the costs and time required to work through the negotiations, documentation, and government approval processes.
Other important factors you need to consider include:
- Is my proposed business operation allowable under Chinese law?
- What type of investment vehicle or legal structure should I use for my China operations? Your business model, type of product or service, industry sector, and internal resources will help to determine your choice of investment vehicle.
- Who will have control over any existing or new intellectual property rights, based on the type of legal structure used?
- How can I best structure my business for tax purposes?
- Where should I locate my business in China? This may depend on business incentives, proximity to partners, suppliers and customers, and availability of infrastructure, resources and staff.
There are various options available for establishing a long-term presence in China. The most common method is via a foreign investment enterprise (FIE), which is typically set up for a specialised purpose. The following provides a brief overview on some of the main types of foreign investment enterprises:
Wholly foreign-owned enterprises (WFOEs)
A WFOE is regarded as a limited liability China business entity, with the foreign investors owning 100 per cent of the equity interest. Therefore, market entrance can occur without the need of a local partner. Although WFOEs are excluded from certain industry sectors, these investment vehicles are becoming increasingly popular with foreign companies as they provide owners greater control over management, business operations and intellectual property. On the flip side, establishing a WFOE requires significant capital investment and a high degree of commitment.
Joint ventures (JVs)
A joint venture is a business arrangement or partnership between a foreign partner and one or more Chinese partners, and involves the sharing of capital, expenses, resources, profits and losses. A foreign company may seek to establish a JV if certain business activities are possible only with Chinese partner support, or to utilise the infrastructure, resources and distribution networks of a Chinese partner.
There are two different types of JVs in China: an Equity Joint Venture (EJV) or a Contractual Joint Venture (CJV). An EJV is a limited liability company, in which profits and losses, management and risks are shared by the parties proportionately to their contributions of registered capital. A CJV does not have to be a legal entity and offers more flexibility than an EJV. Profits and losses arising from the business may be shared on agreed proportions as stipulated by the contract. Obligations of each party are also stipulated in the contract.
If you choose to establish a JV to realise your Chinese strategy, you need to select your Chinese partner wisely and ensure that each partner has common objectives, to avoid a ‘same bed, different dreams’ outcome. To minimise your risk, ensure that you conduct thorough due diligence on potential partners and seek legal advice prior to signing a contract.
Merger and acquisition (M&A)
M&A has become an increasingly popular method for foreign companies to gain a presence in the Chinese market. Foreign companies can purchase whole or part of a local company, which can potentially provide an immediate and effective distribution network within China.
Due diligence needs to be undertaken to assess the value and quality of the Chinese entity. Important M&A considerations include the asset valuation, liabilities, tax position, intellectual property, personnel, and company image.
Other business arrangements
In addition to the aforementioned foreign investment enterprises, another common arrangement for companies seeking to carry out business activities in China is to set up a representative (liaison) office. Setting up a representative office is a relatively easy and cost effective way to establish a presence in China. Although not considered a separate legal entity, parent companies can establish representative offices to conduct support activities including: marketing and promotions; market research; liaison work, and sourcing and procurement. Consequently, representative offices are not permitted to engage in direct business operations.
Austrade can assist you by identifying appropriate service providers in this area, and help you to understand the general issues.
Additional information on 'Setting up in China' can be found on the following website:
Hong Kong Trade Development Council - Guide to doing business with China (extract)
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