1. Should I set up a legal entity in China?


2. So how can I conduct my business in China without an entity?


3. Why is selling via distributor(s) not enough in China?


4. What is the advantage of selling in China using a Letter of Credit?


5. How do I recruit good employees in China?


6. What is the best choice for a manager: foreigner, Chinese or a returnee?


7. Should I start manufacturing in China for selling in the Chinese market? What advantages does this have?


8. If so, do I need to set up a full scale factory in China?


9. How do I control a Chinese subsidiary?


10. How do I make sure that my supplier(s) and my customer(s) in China don’t find each other?


11. Why do I need to hire my employees formally and why do they need to have an office? They are busy running around between clients anyways.

 

 
1. Q: Should I set up a legal entity in China?

A: No need to rush into setting up a company before you know where your market is, before you have a team that can support your business and before you have enough business to justify the setting up of the WFOE.


Setting up a WFOE is a big liability which takes time, money and lots of paperwork. After it is set, managing a WFOE is an even harder challenge which requires expertise of high level employees. For a company that is just entering the China market it is too much to handle and most of the time the employees’ time will be wasted in the challenges of managing the WFOE instead of focusing on the core business of the company.

 

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2. Q: So how can I conduct my business in China without an entity?

A: Companies like PTL can allow you to perform almost every aspect of your business without the need to set up a legal entity: from recruiting employees and employing them, providing them with office space, importing your goods into China and storing them in a front or bonded warehouse, signing sales contracts with your local customers, collecting payments from your clients, sending funds back to the HQ, facilitating purchasing in China and exporting it overseas, and most other business activities that are required to be done in China.

 

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3. Q: Why is selling via distributor(s) not enough in China?

A: Selling through distributors is normally the first step a foreign company takes when coming to China. This step is good for a limited amount of time since selling and distributing in China is very unique; distributors are selling primarily to their captive market and through their personal connections. Once they have exhausted these connections they will look for other products to sell to the same channels rather than looking for new channels.


In order to overcome this limitation, it is recommended to set up multiple sales channels in parallel and set up control and management mechanisms to supervise them all. In any case, it is extremely dangerous to give exclusivity to one distributor since no matter how big it is, it cannot cover the entire market and you need to have a strong distributor in each region in China.

 

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4. Q: What is the advantage of selling in China using a Letter of Credit?

A: Selling with a Letter of Credit is a safe control mechanism that helps the overseas seller be sure he gets his money once the products arrive to the Chinese client.


However, buying through a Letter of Credit is a hassle that takes time and money through a complicated procedure and in most local companies would rather to avoid and just buy locally in a quick and simple way. This will put you at a disadvantage when considering your competitors that have abilities to sell locally.


Also, selling with and LC will not teach you anything about how the Chinese market works, and if you want to get real and significant market share over time by selling in China, you’ll have to sell locally and compete with local competitors.

 

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5. Q: How do I recruit good employees in China?

A: You need a good recruiting company that can give you enough choices of quality candidates that have the necessary experience of what you expect them to do. The most important thing to do is a reference check and ask previous employers questions about their performance and why they are leaving (or left). Also, it’s helpful to find out their motivation for leaving.


It is also legitimate to ask for their salary slip or tax deceleration to verify that the salary the candidate told you that he received is actually true.


Politically incorrect questions that are not accepted in western countries are OK to ask in China; family status, plans to have kids, plans to get married, occupation and health status of parents, salary expectations etc.


After you choose the right candidate, good training is necessary to establish expectations and ground rules of the new position to let them know exactly what you want them to accomplish. Establishing these rules is key, so that after a year of employment, you can see whether they have met your expectations and are on track with the company’s goals and targets.

 

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6. Q: What is the best choice for a manager: foreigner, Chinese or a returnee?

A: None of these options is perfect and it all depends on what your needs are. A foreigner will have the culture and the language barrier to overcome in order to manage Chinese employees, and will have no meaningful network to conduct business in China. On the other hand, communication with the HQ will be smoother and naturally it will be easier for the HQ to trust a foreigner as a manager. A foreigner will be naturally more expensive than a Chinese manager.


A good Chinese manager will bring a large network that can help the business dramatically. He will also know how to manage a Chinese team the “Chinese” way with no surprises that a foreigner may come across. However, transparency with the HQ will be very minimal and the Chinese manager will keep as much control in his hands as possible. As a result, the HQ will be in the dark regarding many aspects of the Chinese operation.


A returnee will not have an advantage, even if he speaks fluent Chinese and graduated from a prestigious university in the West. He, just like a foreigner, will be lacking the network and foundation of business connections that make the industry move. At the same time he will cost substantially more than the Chinese manager. He might communicate better with the HQ but the fact that he speaks Chinese might not really help to know what is really happening in the company.


Hiring Singaporean, Hong Konger or Taiwanese managers will have the same effect, although they have the advantage of speaking Chinese. Chinese employees will see them as outsiders just like they see the Western foreigner, so often they might not cooperate very well with either.

 

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7. Q: Should I start manufacturing in China for selling in the Chinese market? What advantages does this have?

A: A lot of companies that have been selling in China soon start to feel the pressure of having to start manufacturing in China. With local competition getting better and the technological gap closing, foreign companies are risking losing market share because they are no longer price competitive. Therefore they must consider local manufacturing operations.

 

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8. Q: If so, do I need to set up a full scale factory in China?

A: It depends on your needs and budget. If you need to setup a full scale factory and you have the budget for it, then you certain can do that. There are funds available for the purpose of setting up a factory, and we can help with this. But it depends on the industry, your wants and needs.


There are other options like incubators that can host your production or assembly line in which they do the general plant management and you focus on managing the production lines. Incubators work very well for companies that don’t necessarily need a full scale factory from day one - sometimes all that is needed to start is 200-1000 sqm. Later as the sales volume increases, the company can incrementally expand production under this model.

 

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9. Q: How do I control a Chinese subsidiary?

A: Firstly, hire good people, provide training, set good work flows, and ensure that the employees follow them.


Secondly, have department managers at the headquarters talk directly to department managers in China. It’s not good to have a single contact at headquarters and a single contact in China because you’ll lose a lot of the communication and won’t know everything that’s going on.


Thirdly, you should set up some control mechanisms over the operations in China, e.g. an external company that can come in to check many aspects of the business. Not only should the books and the financials be audited, but also the general operations of the business including the relationships between departments, employee/management relationships, registration and license status checks, money flows, traveling, allowances and the HR, logistics, and manufacturing processes.


If you bring in a neutral company that has experience in this type of operational audit, you may be surprised to find important things that need to be addressed immediately.

 

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10. Q: How do I make sure that my supplier(s) and my customer(s) in China don’t find each other?

A: If you manufacture your product in China and you want to sell it in China, it helps tremendously to have a local company which has a buying and selling license act as a separation between the customer and the supplier. This protects and maintains the control of the foreign company from overseas. If you’d like an OEM to manufacture for you, it’s best to break your design/product into several parts or sub-products to prevent the OEM from using the complete product in other production ventures with other customers for their own gain.


Generally, IP protection in China is a complicated and risky topic with many challenges.

 

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11. Q: Why do I need to hire my employees formally and why do they need to have an office? They are busy running around between clients anyways.

A: Aside from the fact that it is illegal to employ people outside a formal Chinese employer, most employees in China would prefer to have a formal employment that entitles them to the social benefits that are greatly important for their well being and pension.


Formally hiring your employees gives them the security that their employer is serious and not going to vanish from the Chinese market at any given time. It also helps the sales people show their clients that there is a serious overseas company behind them that made some investment in people and offices. This also gives “face” to the company in China.


Setting up normal working processes in a proper working environment will help the employees feel more loyal and more structured which will assist the control and supervision of the operation in China.


Such office can serve the overseas managers when they come to China and give them a proper working area and meeting place.

 

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