How to Avoid the Common Pitfalls of Foreign-Owned Company Management in China?

August 30, 2022
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In the past few years, setting up a company in China has become relatively easy compared to previous years. As a result, many inexperienced local agents offer to set up a WFOE (Wholly Foreign Owned Entity) for a very low cost. Many foreign companies take the bait – and end up with a WFOE that does not meet their needs, or worse, WFOE that isn’t registered properly.

Unfortunately, it’s easy for overseas companies to lose sight of what goes on in China-based operations. At PTL Group, we witness many acts of unprofessional, unregulated, misled and sometimes even criminal business activity in WFOEs set up by overseas companies in China. The grave consequences of setting up a WFOE without professional knowledge are sometimes discovered a few months or even years after initial operation. By that time, the damage can be very hard to contain.

Mismanagement begins with a lack of knowledge and transparency. Eventually, it can lead to months and years of unprofessional business conduct, which at best does not comply with Chinese business regulations. At worst, this conduct involves harmful systematic actions that may lead to business termination in China or a ban by Chinese authorities from conducting any business in the country.

WFOEs that are set up properly and managed in accordance with regulated work procedures and localized business models, enable overseas management to easily assume control of their China-based operations. That doesn’t necessarily mean that mismanaged WFOEs cannot be saved. The quicker an external professional team enters the picture and conducts a full operational audit, the better the chances for turnaround.

Check out our golden rules for effective China WFOE management:

  • Initial Set-Up: Choose a reputable agent with proven references to set up your WFOE. After the WFOE establishment, put some thought into choosing major position holders: Legal Rep, GM, Directors, Supervisor. Take your time, examine references, and don’t hesitate to consult with professional advisors.
  • Finance: If you are not in China, assign a trusted party to hold your stamps, licenses and bank key. For your accounting in China, choose a reputable accountant that can manage your books and serve as an activity supervisor. Give him or her the authority to investigate financial activities on your behalf. Establish clear financial work processes and guidelines.
  • HR: Define and implement clear HR processes and guidelines. After conducting proper reference checks, select a suitable manager and local team. Provide your team with ongoing training and mentorship.
  • Control: Assign a 3rd party to conduct periodical operational audits in China that examine bookkeeping, finances, and HR work processes: stock counts, invoices, cash, banks, sales contracts, employment contracts, etc. Apply control and supervision mechanisms to other areas, as well. Don’t be afraid to check up on your employees and examine their work.
  • Integrated business management: While each business aspect’s proper management is not something you should compromise on, it’s also recommended to have a broader view of the entire China operation. Multi-disciplinary management not only responds to each department’s needs, but also ensures seamless integration between them and a comprehensive support framework for the business as a whole.

Summary: Many overseas managers think that setting up work processes and control mechanism sends a message that they don’t trust their employees. We believe that it is the contrary; it shows that they care about the business and their employees’ well-being and that they are dedicated to creating a healthy company culture.

PTL Group provides management and operational services for international companies throughout their market entry and growth stages in China. Contact us today and we’d love to accompany you too through your unique journey in the Chinese market.

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